The week ahead 15 May 2023 - UK interest rates rise again
What to watch out for in the UK economy and property market this week.
As expected, the Bank of England hiked rates by 25 bps to 4.50%, following similar increases from the Fed and the ECB earlier in the month. The Bank has revised up its GDP forecasts and is no longer predicting a recession this year. Friday also saw the news that the UK economy grew in the first quarter – albeit only by 0.1%, and with a contraction of -0.3% in March. This may have been down to some exceptional factors, including numerous strikes and unusually wet weather. Even so, the consumer-facing services sectors contracted by -0.8% in the month, reinforcing our view that the impact of inflation and higher interest rates has yet to fully feed through into the real economy – and thus that further weakening in economic activity is likely over the coming months.
The consensus among economists is that this will lead the BoE to hold rates at their current level and on balance we probably agree, although the risk is still very much to the upside. Around the world, inflation, growth and labour markets have been more resilient than expected and this is particularly true in Britain where inflation is proving very slow to recede. UK inflation is now more than double that in the US, driven by greater exposure to higher energy costs (which should now moderate quite quickly) and a much tighter labour market leading to stronger wage growth, particularly in the service sector. The latter will take much longer to fade, which is why we think inflation could prove stickier (and thus interest rates could remain elevated for longer) than many expect – although the signs of service sector weakness in the latest GDP data may mean this pressure is also set to ease a little.
Today sees the release of the MSCI UK property monthly index for April, which should make for interesting reading given the unexpected return to capital value growth seen in March. Given the general uncertainty surrounding the major property sectors, we suspect slightly negative figures will be reported for April. Greater stability in debt markets, stronger GDP growth and more confidence in the outlook for property are needed to create a true turning point for the investment market, and these ingredients are missing at present. Nevertheless, we are increasingly confident the worst of the correction for values has occurred. A second half recovery is our central scenario, albeit weighted towards the back end of the year and led by prime assets.
This week also sees industrial production figures for the Euro Area and the ZEW survey of analysts on the outlook for Germany. In both cases we expect to see a loss of some of the momentum seen lately, as higher interest rates weigh on the economy. This is likely be an ongoing theme in the economic news globally over the months ahead.
Things to watch for this week
Monday 15th May
MSCI UK Monthly Capital Growth, April
Previous: 0.2% m-on-m
Forecast: -0.3%
We believe ongoing issues of bearish sentiment and more expensive debt continued weigh on the property market in April, leading us to forecast a marginally negative capital growth figure.
Euro Area Industrial Production, March
Previous: 1.5% m-on-m
Forecast: -1.5%
As a result of relatively strong figures in January and February, we suspect a lot of restocking of inventories and clearing of order backlogs has occurred, resulting in slower demand in March.
Tuesday 16th May
Germany ZEW Sentiment Index, May
Previous: 4.1
Forecast: -3.0
The rebound in sentiment seen over the last four months lost momentum in March and April, probably due to higher interest rates starting to pinch. We believe a combination of higher rates and elevated inflation will push the index back into the red.
