The week ahead 06 March 2023 - Inflation rears its head again

What to watch out for in the UK economy and property market this week.

Last week saw evidence emerge that inflation might be gathering steam again, as France, Germany and Spain reported figures that exceeded forecasts. This comes on top of growing concerns that upbeat economic data from the US could prompt the Fed to hike interest rates higher than previously expected. Swap rates have risen markedly in the last month for the Eurozone, US and UK. This led to an intervention by the Bank of England (BoE) Governor, Andrew Bailey, who said he viewed current swaps pricing as too high. The Bank’s present line is that it has paused rate hikes for now while monitoring the effect on the economy. The market is assuming the base rate will rise to around 4.75%, and Governor Bailey’s comments seem to have had little impact.

BoE’s dilemma is that the mood surrounding the UK economy is darker than other G7 nations. The consensus forecast view is that for the full year 2023 the Euro Area and US will achieve growth (0.4% and 0.7% respectively) but the UK will contract (-0.8%). The weaker outlook counts in favour of leaving rates unchanged, but if the Fed and ECB hike and BoE does not follow suit, then the UK imports inflation. We suspect the Bank will stick to its strategy of monitoring events, as much of the impact of the existing rate hikes has not yet filtered through to the economy. However, whereas a month ago it looked like certainty was starting to return to the debt market, suddenly the outlook has become cloudy again. This probably rolls back a little further the point where investors start to return to the property market in large numbers.

This week sees the UK release GDP figures for January 2023. Given the run of better-than-expected figures seen lately, our forecast is for the economy to have flatlined. We see this giving way to a contraction in the coming months though, due to higher interest rates and the on-going household incomes crisis. The US will release pay rolls data on Friday, which is expected to show a slowdown in job creation. Another upbeat figure would fuel speculation that interest rates will rise higher this year than previously supposed.

Things to watch for this week

Wednesday 8th March

Germany Industrial Production, January

Previous: -3.1%
Forecast: 1.5%

After December’s contraction, we are expecting a return to growth thanks to lower energy prices and strengthening supply chains.

Friday 10th March

UK Monthly GDP, January

Previous: -0.5% m-on-m
Forecast: 0.0%

Data lately for the UK economy points to a degree of resilience, although the economy still faces significant headwinds. We are predicting the January GDP figure to flatline, although the risks are on the downside.

US Non-Farm Payrolls, February

Previous: 517k
Forecast: 207k

After the spike in job creation seen in January, we expect the tech and finance layoffs announced around the turn of the year to start weighing on the labour market figures in February.