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The week ahead 06 February 2023 - Threadneedle Street hits the pause button

06 February 2023

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

Last week saw the Bank of England (BoE), ECB and the Fed all hike rates, as was expected. BoE will now join the Bank of Canada in pausing to monitor the effects on the economy of the increases that have already occurred. In contrast, the ECB and Fed are still planning future rises. Inflation is in fact lower in the Eurozone and the US than the UK, so one would normally expect BoE to be more hawkish. However, Threadneedle Street is becoming concerned over the strength of the UK economy and its ability to withstand further tightening. Data last week showed a 57% rise in 2022 in company bankruptcies in England and Wales.

Recessions are usually deflationary and so is raising interest rates. Normally when central banks are hiking rates, inflation is slightly elevated and they are nudging it back towards target. However, these are unusual times and BoE is not walking a familiar path. Today, inflation is very high and there is a certain amount of guess work going on as to how much rates need to increase in order to cut inflation without tipping the country into a deep downturn – as opposed to the mild recession BoE view as an acceptable outcome. Our view is the Bank is right to pause as the effects of the ten interest rate hikes in the last 14 months will only come through gradually as fixed rates on debts expire. Meanwhile, the recession will add some spare capacity into the labour market, dampening wage growth.

This week the UK releases GDP figures for Q4 2022. The general expectation is they will be marginally positive, so Britain will avoid meeting the criteria for a technical recession – although that will probably just be a temporary reprieve. Also, Germany will report inflation data for January, with many analysts expecting a small increase. This could mean that some of the fall in Euro Area inflation for January reported last week will be eroded when the data is reviewed.

Things to watch for this week

Tuesday 7th February

Halifax House Price Index, January

Previous: -1.5% m-on-m
Forecast: -0.4%

Recent data from the Bank of England showed a marked drop in mortgage lending in December, leading us to believe that the slide for house prices will have continued in January.

Thursday 9th February

German Inflation, January

Previous: 8.6%
Forecast: 8.9%

The end of some temporary subsidies and changes to methodology are expected to push up inflation in January. However, we expect the trend this year to be one of sharp decline.

Friday 10th February

UK GDP, Q4 2022

Previous: -0.3%
Forecast: 0.1%

Although forecasters are expecting GDP to contract in the month of December, growth in October and November should mean growth for the quarter overall is positive.

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