The week ahead 18 September 2023 - Evidence mounts that the economy is slowing

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

Last week saw a deeper than expected contraction for UK GDP in July, which month-on-month fell by -0.5%. Analysts had predicted a more subdued -0.2% decline. This was partly due to industrial action, although the fall did extend to several major industries that did not see strikes, such as Information and Communication. The labour market data also painted a downbeat picture, with the unemployment rate rising as job vacancies fell. While the media coverage focussed on high levels of pay growth, we suspect that could now quickly decline if more people are searching for work. For real estate, news that labour demand is softening as business activity slows has implications for occupier markets. We could see more landlords prepared to offer generous terms in the coming months to persuade a tenant with an upcoming expiry to extend their lease rather than relocate. 

The latest UK MSCI (IPD) Monthly Index confirmed that the commercial property investment market remains in a downturn, and with very mixed conditions across the sectors. Month-on-month all property capital values fell by -0.4% in August, versus -0.5% in July. Offices remained the worst performing of the main sectors, with a monthly fall of -1.2%, while industrial managed a tiny rise in values of 0.1%. While the worst of the price correction for commercial property happened last year, the market is struggling to find a fresh wave of confidence that can lift it into a new cycle. For that to happen we will probably need some stronger economic news, which is unlikely in the short-term. On a more optimistic note, some banks cut their mortgage rates last week as confidence grows that the base rate may be close to its peak. 

Following on from last week’s 25 bps rate hike from the ECB to 4.50%, this Wednesday the US Federal Reserve will make its policy rate announcement; followed by the Bank of England on Thursday. US core inflation fell in August, and we believe this will give the Fed the confidence to leave rates unchanged for now. The Bank of England decision looks more finely balanced, but we suspect another 25 bps hike will be announced, then the base rate will stay at 5.50% for some time to come. 

Things to watch for this week

Wednesday 20th September 

Fed Funds Rate decision, September 

Previous: 5.25%-5.50% 
Forecast: 5.25%-5.50%

With core inflation still falling, we are forecasting the Fed to leave interest rates steady while it monitors the economic data over the coming months. 

UK Inflation, August  

Previous: 6.8%
Forecast: 7.0%

Rising petrol prices lead us to expect a small increase for headline inflation, however we also believe core inflation will fall as higher interest rates slow the economy. 

Thursday 21st September 

Bank of England Rate decision, September

Previous: 5.25%  
Forecast: 5.50% 

Many have taken recent comments by Governor Andrew Bailey as hinting a 25 bps hike is coming this week. However, the Bank’s Chief Economist also suggested he now favours no change. On balance, we suspect a hike is coming and this will mark the peak for rates. 

Friday 22nd September

Euro Area ‘Flash’ Composite PMI, September  

Previous: 46.7 
Forecast: 46.3 

The convention of the PMI indices is that a reading under 50 suggests output is contracting. We are expecting another sub-50 figure for the Euro Area due to high interest rates and weak manufacturing output.