The week ahead 16 October 2023 - UK economy grows, but slowly
What to watch out for in the UK economy and property market this week.
The August GDP figures showed the economy grew month-on-month by 0.2%, marking an improvement on the -0.6% figure for July. However, that means another positive figure in September will be needed to avoid an overall negative reading for Q3 GDP. An interesting development in August was the bifurcation in performance between consumer-facing services, which contracted, and other services which grew robustly. The largest negative drag came from Sports, Amusement and Recreation which perhaps indicates that consumers are becoming more frugal as mortgage and credit card repayments increase due to the 14 base rate hikes since December 2021. On the other hand, there was strong growth for Professional, Scientific and Technical Services and Information and Communication.
The key takeaways from the GDP figures are: growth remains subdued, but we have so far avoided a recession despite significant headwinds. However, the consumer side of the economy is feeling the impact of high interest rates. This has several implications for commercial property. The UK economy has proved more resilient in the last year than forecasters expected, which is perhaps at odds with the sharp falls we have seen in values for the main property sectors. The change in the interest rate environment arguably justifies the extent of the correction to date, however GDP holding up (albeit at a marginal rate) further supports our view that the worst of the fall in values has occurred. The GDP figures do not bode well for consumer-facing real estate, although there is significant variation within the consumer industries – Accommodation for instance, which includes hotels, had a good August.
This week sees data on the labour market and inflation for the UK. The Bank of England will be looking for evidence that the jobs market is continuing to cool. If the inflation figure, which is out on Wednesday, exceeds forecasts and there isn’t evidence of a slowdown for wages, the Bank of England may be tempted to consider another rate hike in the future.
Things to watch for this week
Tuesday, October 17th
UK Unemployment Rate, August
Previous: 4.3%
Forecast: 4.3%
The UK labour market figures have been cooling for several months, with the unemployment rising from a low of 3.5% in August 2022 to 4.3% in July 2023. We are expecting a similar figure for August 2023, but over the coming months we are predicting unemployment to increase further.
US Manufacturing Production, m-on-m, September
Previous: 0.1%
Forecast: -0.1%
The US manufacturing figures achieved marginal growth in August, in part due to a significant fall in production of motor vehicles and parts. We see a combination of labour disputes and higher interest rates further cutting into the production of manufactured goods, resulting in a small contraction in September.
ZEW Euro Area Economic Sentiment, October
Previous: -8.9
Forecast: -7.3
This survey of economists on their outlook for the Euro Area has been in negative territory for five consecutive months. With interest rates high and key economies struggling to grow, we believe the October survey will show analysts are still in a bearish mood.
Wednesday, October 18th
UK CPI Inflation, y-on-y, September
Previous: 6.7%
Forecast: 6.5%
We are forecasting a further fall in both headline and core inflation in September, however the Bank of England may grow concern over the relatively slow rate at which inflation is decelerating. UK inflation looks high compared to other G7 economies.
