Economy: HSBC sees reasons for optimism

Although the economy remains mired in recession, there has been a subtle shift in some of the recent commentary on current trends, says HSBC in its monthly commentary.

Whilst nobody would dare use the expression "green shoots",

there are one or two "straws in the wind" which suggest that the lowest point of the downturn may be in sight. Most of the key numbers are still in negative territory but many are getting worse more slowly. A decline in the rate of deterioration may be the first step on the road to an improvement.

There are signs of life emerging in the housing market. Mortgage approvals in February rose to their highest for nine months, albeit from a low base. The Nationwide House Price Index recorded

its first increase for 18 months in March (although the Halifax measure came in lower) and several housebuilders have reported higher viewing figures in the last few months.

Given the huge improvements in affordability (house prices and interest rates relative to income), it would be surprising if demand was not starting to stir. Just because houses were unaffordable in 2007-08, didn’t mean people no longer needed somewhere to live. All that is required (especially

for first-time buyers) is a supply of adequate mortgage finance and this seems now to be happening.

It also appears that households are at last trying to deal with the huge debt burden. Following the massive reduction in interest rates over the last six months, there was a net repayment of £245 million of consumer credit, the first net repayment since the series started in April 1993. In Q4 2008, moreover, homeowners used their own funds (to the tune of £8 billion) to complement borrowing to add to their housing investment, the biggest net injection into the housing market since records began in 1970.

What the last set of national accounts revealed, moreover, was widespread destocking by businesses, as is usual at this point in a downturn. But destocking is a one-off adjustment and is replaced by

the need to restock, the first step in the recovery process. More significantly, the closely-watched forward-looking Purchasing Managers Index surveys seem to be turning up. Although still below the threshold of 50 (implying that activity will contract), the responses have stopped declining. In March, the manufacturing result was the highest since last October and in services the best since last September.