UK house prices surged in January, but falling domestic demand led to a fall in manufacturing growth.
Drill down and the pound has a lot to do with it.
The post Brexit falls in the pound eventually forced UK inflation to rise, meaning that real wages fell.
They are still falling, although the one-off effect of the falls in the pound seen in 2016 is beginning to work its way out of the system, meaning inflation should start to drop soon, and real wages rise. Err, unless that is commodity prices start to rise sharply, something that they have been showing signs of doing, as the latest survey suggests.
Be that as it may, the fact is that the fall in the pound has knocked the consumer, hitting the domestic economy, but because it has made goods made in the UK seem cheaper when measured in euros, and other foreign currencies, demand from abroad is rising.
Put all that together, and what do you get?
Answer: the latest closely watched purchasing managers index, or PMI if you prefer shorthand, dropped in January, but the one positive piece of news related to overseas demand.
Markit, which puts the PMI together, put it this way: “Manufacturing output continued to rise at a solid pace, although the rate of expansion eased to a six-month low.”
But focus on international markets and things look better. Markit said: “January saw the trend in new export order inflows strengthen. Foreign demand improved at one of the quickest rates over the past four years. There were reports of increased sales to clients in North America, China, mainland Europe, the Middle East and Japan.”
One worry relates to cost. The pound may have stopped falling a year or so ago, but, as Markit said: “Purchase prices rose at the fastest rate in 11 months and to one of the greatest extents in the survey history. Companies reported a wide range of raw materials and commodities as up in price, including chemicals, food products, metals, oil, paper and plastics. Part of the increase in costs was passed on to clients in the form of higher selling prices. January saw the steepest increase in output charges since April of last year.”
Samuel Tombs, Chief UK Economist, Pantheon Macroeconomics said: "All the survey’s balances are volatile and global demand is strong, so it’s too soon to call time on the manufacturing sector’s growth spurt yet. But today’s survey hints that the best days of the manufacturing sector’s recovery lie in the past."
And: "Domestic demand can’t withstand the hefty price rises that producers are being forced to implement in response to the recent jump in commodity prices.”
Yet the housing market seems unperturbed. Last year the market was lacklustre, at best, but finished the year in good fettle. It got off to a solid start in 2018, too.
According to the latest house price survey from Nationwide, house prices rose 0.6 per cent in January, as they did in December last year. That takes the annual growth rate to 3.2 per cent – not especially quick for sure, but a big chunk of the annual growth rate does seem to have occurred in the last two months.
Robert Gardner, Nationwide's Chief Economist, said: "The acceleration in annual house price growth is a little surprising, given signs of softening in the household sector in recent months. Retail sales were relatively soft over the Christmas period, as were key measures of consumer confidence, as the squeeze on household incomes continued to take its toll. "
He added: "Nevertheless, housing market activity is expected to slow only modestly since unemployment and mortgage interest rates are expected to remain low by historic standards. Similarly, the subdued pace of building activity evident in recent years and the shortage of properties on the market are likely to provide ongoing support for house prices."
Hansen Lu, Property Economist at Capital Economics said: "Looking ahead, there are few reasons to expect an acceleration in prices," but added: "in the final quarter of last year, mortgage rates remain close to a record low, and there is no sign of a rise in unemployment. As a result, the recent slew of weak housing market data is unlikely to be signaling an imminent collapse in prices either. In all, we expect house prices to rise by two per cent over the course of 2018."