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The week ahead 24 July 2023 - Some good news on the UK economy

24 July 2023

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

The Week Ahead has made for downbeat reading in recent weeks, so it is good to have some encouraging news to report. The latest UK inflation figures saw bigger-than-expected falls for both headline and core inflation, causing the one-year swap rate to fall around 20 bps to 6.0% by Thursday. Headline CPI inflation stood at 7.9% in June, down from 8.7% in May, which was better than the consensus forecast of 8.2%. Analysts had expected core inflation to remain unchanged at 7.1%, so the decline to 6.9% is encouraging. The five-year swap rate – a benchmark often used in pricing property debt – on Thursday last week was down to 5.0%, while the latest figures from MSCI showed the all-property average equivalent yield for June was just below 6.7%. The sector breakdown was: 7.0% for retail, 7.7% for offices and 6.0% for industrial (note these figures are not prime yields and are based on a large basket of assets of various qualities). 

The other upbeat news story was the UK retail sales figures. Month-on-month retail sales volume was up 0.7% in June, well ahead of a consensus forecast of 0.1%, in part due to warm weather causing a surprise increase in sales of outdoors goods by department stores. However, the latest GfK index showed a decline in UK consumer confidence from -24 in June to -30 in July. 

Encouraging as all the above news is, the big picture is that the UK economy still faces significant headwinds, with the base rate set to rise higher – perhaps to around 5.75%. This will increase pressure on consumer incomes, and some analysts are once again talking about the possibility of a mild recession. That is a prediction that has failed to materialise before in the last 18 months, which does not preclude it finally happening. With continued economic uncertainty ahead, we expect to see the property investment market remain subdued over the coming months. However, when interest rates do peak, possibly in the autumn, we believe opportunistic real estate investors will deploy money. We view that scenario as a growing possibility for Q4. 

This week sees interest rate decisions from the Fed and the ECB, with both expected to hike rates despite recent falls for inflation. Both will want to ensure inflation completely returns to around the target rate of 2.0%, and reset the expectations of the public on future inflation to avoid a wage-price spiral. The US will also report GDP figures, which are expected to show continued growth but at a moderate pace. 

Things to watch for this week

Wednesday 26th July

Fed Policy Rate Decision, July 

Previous: 5.00%-5.25%
Forecast: 5.25%-5.50% 

US headline inflation is now at 3.0%, but core inflation remains relatively high by historic standards at 4.8%. We see the Fed choosing to maintain the downwards pressure on prices with another rate hike. This might be the last increase by the Fed of this rate hiking cycle. 

Thursday 27th July

ECB Policy Rate Decision, July 

Previous: 3.50%
Forecast: 3.75% 

We are forecasting the ECB will continue to tighten policy as it remains focussed on bringing core inflation down. However, there is now some disparity on inflation rates in the Euro Area between major economies which complicates its task, e.g. Spain at 1.6%, but Germany at 6.8%. 

US GDP Growth, Q2 2023 

Previous: 2.0% (annualised)
Forecast: 1.8% 

The consensus forecast is that the US economy probably grew by 1.8% in Q2, although interestingly the Atlanta Fed’s GDP ‘Nowcast’ is slightly more optimistic at 2.0%. 

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