What does the economic outlook mean for the UK commercial property market? Insights from David Smith

This week our Capital Markets team hosted David Smith, Economics Editor of The Sunday Times, for a session on the economic outlook and what it means for the property market.
 
The session opened with a reminder of the UK's standing with overseas investors. In the first half of this year, it was the second most invested real estate market for international capital, behind only the United States. The largest flows came from the US, Canada, France, Spain and Germany, and the UK is a top five destination for investors from Singapore, Japan and Australia.
 
David's talk has been edited into questions and answers below.

You describe the past 15 years as a run of shocks. What were they?

What major economic shocks have affected the UK economy over the past 15 years?

I call them the four economic horsemen of the apocalypse. The first was the financial crisis. Before it, the UK could count on productivity growth of about 2 per cent a year. We have never had that since, and productivity is almost everything in the long run.
 
In 2016 we had the Brexit vote and the start of Trump's first trade wars. Then Covid. GDP fell by 20 per cent in the second quarter of 2020, when the previous record quarterly fall was 2.8 per cent, during the three-day week of 1974. Just as we were coming out of Covid, Russia invaded Ukraine and we had an energy shock.
 
Since then, we've had the tariffs that followed Liberation Day last year, and now the war with Iran, which is having serious economic consequences.

With all that going on, is the world heading for recession?

Is the global economy heading for a recession?

No. When everything is clicking, the world grows by about 4 per cent a year. We're a bit below that, but there is growth everywhere and no country is in recession. This year has turned out slightly better than the IMF expected when the Iran war began in the spring. America is stronger than Europe, despite everything. China is growing at 4 to 5 per cent, a long way from the nearly 10 per cent it averaged from the late 1970s. India is now growing faster.

The UK has had its share of gloomy forecasts. How has it actually done?

How is the UK economy performing in 2026?

It keeps surprising on the upside. We had the strongest growth in the G7 in the first half of the year, and it carried on into the summer with a good figure for July. The purchasing managers' surveys have been strong too. They're easy to read, because anything above 50 means growth, and they are currently above that 50 level.

Forecasters downgraded the UK early in the year and upgraded it in the summer. We in the press report the downgrades rather more than the upgrades, which is not a good thing.

Is inflation back?

Is inflation rising again in the UK?

This was supposed to be the year inflation went away. In February the Bank of England expected it to drop to 2 per cent in April and stay there. The Iran war changed that. Oil is around $100 a barrel. For the UK, gas matters more now, and gas is still very expensive, so energy bills go up again in October and probably again in January.
 
Even so, we won't see anything like 2022. An energy shock fades unless it feeds into pay settlements and prices more generally, and that isn't happening. We're also less exposed than we were in the 1970s, when every 1 per cent of growth needed 1 per cent more energy.

Is there anything that worries you?

What are the biggest risks facing the global economy today?

The oil reserves. Most countries have been running down their strategic reserves to stop prices rising further. In the US they're at their lowest since 1982. If the conflict goes on and they can't draw on them anymore, that's a vulnerability, and prices will go even higher.

Will interest rates go up?

Will UK interest rates rise again?

Probably a little, in time. Not as much as the markets expect, though. The year started with people forecasting three or four cuts, so just holding at 3.75 per cent means policy has tightened relative to that. Most of the Monetary Policy Committee are waiting to see wages respond to higher inflation, and there's no sign of it. Private sector pay settlements are very low.

Look at the European Central Bank. Its main rate was below zero not long ago and is now 2.5 per cent. We would love rates like that here.

With so much political focus on the regions, is London losing out?

Is London still attractive to global investors and businesses?

London's ability to reinvent itself still amazes me. I didn't grow up here, but I've lived here a long time. Thirty-five years ago, the south bank between London Bridge and Tower Bridge was derelict and nobody went near it at weekends. Now Borough Market is on every tourist itinerary. King's Cross had a terrible reputation, and the redevelopment has been fantastic.
 
As a financial centre, people fixate on equity listings. Look at it in the round and London is still very strong, in foreign exchange and in a lot of less well known specialisms. For years people said one of the Asian centres would overtake us. It hasn't happened. Nothing in the EU comes close, and Frankfurt is just outside the top ten.
 
The regional cities should benefit from the devolution agenda, and rightly so. But London is more dominant than any other European capital. Abroad, if I say I'm from The Times of London, everyone knows what that means. I wouldn't be alarmed about devolution damaging London.

What can we expect from the Budget?

What could the next UK Budget mean for the economy and property market?

Not much room for manoeuvre. Public sector debt is close to £3 trillion. In 2007 it was £400 billion. Twenty years ago, it was about 35 per cent of GDP and nobody worried much about it, because the debt people worried about was household debt. Now it's about 94 per cent. Ten-year gilt yields are above 5 per cent, so the interest bill is enormous.
 
What's different this year is that nothing has leaked. Last year the speculation began in July and ran all summer. It did real damage to the property market, and to growth in the second half.

Do you have an indicator of your own?

What economic indicators can signal future growth?

The skip index. I count the builders' skips in my street. None means recession, two means growth at about trend, and four or more is an unsustainable boom. During the first lockdown there were none. Then everyone decided they'd work from home forever and wanted an office in the garden. At one point there were more than four, and I was a bit worried about that. In the past few months there have usually been at least two or three skips, in line with the decent growth figures we have had.

David Smith is Economics Editor of The Sunday Times. His books include The Dragon and the Elephant: China, India and the New World Order.