UK Economy – Current Outlook
In a recent statement by Andrew Bailey, the Bank of England (BoE) warned that the UK economy was set to drop into a 15-month recession in the final quarter of this year. This no doubt contributed to the pound’s continued slump against the dollar and euro which began following the Brexit referendum in 2016.
This news is accompanied by the fact that interest rates are likely to continue rising until inflation is curtailed, something most commentators do not expect to happen until the second half of 2023. There is a general consensus that the BoE rate will surpass 2% (currently 1.75%) by the end of the year and reach 3% in 2023. While there has been some positive news in consumer facing sectors including hospitality, this is likely to be short-lived once cooler weather sets in and tourism activity subsides.
This outlook is not unique to the United Kingdom – the euro is facing strong headwinds and a Eurozone recession is expected off the back of the current energy crisis. In the US, annualised sales of newly built homes fell 12.6% year on year in July and the stock market has turned bear.
The change in climate is evident in the UK property market, with price growth rates having slowed from Q2. As with Nationwide, Halifax reported that house price growth ground to a halt in July and that a period of house price growth reversal is likely in the short term. According to Capital Economics, mortgage approvals and transactions are set to slump to their lowest levels in over a decade within the next 6 months. In light of this, property investors are, in the first instance, focusing their attention on income with rents expected to continue rising in line with inflation. As prices cool down further, there will be more opportunities to pick up new assets at relative value.
As mentioned in previous reports, an economic recovery will be heavily reliant on a fully fledged return of the international market, something which has been hindered by the lingering effects of Covid-19 and the conflict in Ukraine. The political climate following Brexit is also a factor and it will be up to Boris Johnson’s successor to continue attracting investors in a post-EU world. Considering London’s status as a truly global economic hub in Europe, the English language, the UK’s tradition of rule of law and the evident vulnerability of continental Europe to the threat of Russia, this should not be a difficult task.
There is no certainty as to how quickly a recovery will come about, but the BoE’s indication of a 15-month recession seems to be a good starting point.