The week ahead 19 February 2024 - The UK moves into a mild technical recession
What to watch out for in the UK economy and property market this week.
Data released last week confirmed the UK experienced a mild technical recession in the second half of last year, with GDP contracting by -0.1% in Q3 and -0.3% in Q4. Within the Services sector, the worst performing industry was Wholesale and Retail, which confirms that the squeeze on household incomes continues to weigh on the consumer side of the economy. Within the Production sector, the worst performance came from Manufacturing, which is consistent with a global picture of weak demand for factory-made goods. That said, the Bank of England has warned against reading too much into a Q3-Q4 2023 recession, as they expect growth to improve as this year progresses. Separately, last week saw the European Commission revised down its forecasts for EU GDP growth and inflation; also Japan reported a recession in Q3-Q4 2023.
On the plus side, the disappointing news on growth will increase pressure on the Bank of England to cut interest rates in the coming months. This should ease some of the pressure on the UK property investment market, where the MSCI All Property Capital Growth index recorded another fall in January of -0.34% month-on-month, although the rate decline did slow from -0.98% in December. While we believe the time lagged effect of 14 base rate hikes since December 2021 will continue to weight on the economy in the first half of this year, we are anticipating a sharp fall for inflation in April, easing the squeeze on consumer incomes. This, along with less strike action in the pipeline, bodes well for a return to growth for the economy in the second half of the year. A combination of future base rate cuts and improving growth forecast for H2 should provide a foundation for a new property investment market cycle, perhaps by late spring or the summer.
This week sees the release of ‘flash’ PMI data for most advanced economies for February. For the UK, the PMI figures last month were relatively upbeat, so we suspect they will remain steady at the January level based on optimism that interest rate cuts are approaching. Also, Eurozone and UK consumer confidence figures will be published.
Things to watch for this week
Wednesday, February 21st
Euro Area ‘flash’ Consumer Confidence Index, February
Previous: -16.1
Forecast: -15.5
With inflation easing and confidence building that interest rate cuts are approaching, we believe consumer confidence has probably improved slightly.
Thursday, February 22nd
UK ‘flash’ Composite PMI, February
Previous: 52.9
Forecast: 52.9
After a strong reading in January, we do not see much scope for improvement for the index before inflation sees a more significant drop, perhaps in April. So, we are predicting no change.
Friday, February 23rd
GfK UK Consumer Confidence Index, February
Previous: -19
Forecast: -17
Recent wages data points to real terms pay growth, which we believe has caused a rise in consumer confidence.
Ifo German Business Climate, February
Previous: 85.2
Forecast: 84.7
This index is based on a survey of firms and their expectations for trading conditions in the coming months. The index has been edging down lately, and we suspect exporters in particular may now be feeling the effects of supply chain disruption resulting from events in the Middle East.
