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The week ahead 27 March 2023 - Central banks hike rates despite lender insolvencies

27 March 2023

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

Last week saw the US Federal Reserve and the Bank of England raise interest rates by 25 bps each, and the Swiss National Bank by 50 bps, despite the bank failures seen lately. This follows the ECB increasing rates by 50 bps the previous week. We view this as mixed news. On the positive side, policymakers clearly feel confident that the balance sheet problems are confined to a handful of banks and the great majority are strong enough to cope with higher rates. On the downside, debt has become more expensive and less available. However, the financial markets do seem to be taking some reassurance from statements from authorities that banks today are better capitalised, although sentiment remains volatile. Overall, the sky over the economy has got slightly darker again, but the mood is probably not as nervous as a week ago. Our analysis of the property implications of the bank runs can be found here, and the Bank of England rate hike here.

Turning to the broader economy, ‘flash’ PMI figures for March painted a relatively optimistic picture, at least for services firms. The UK composite PMI eased from 53.1 in February to 52.2 March, with services at 52.8 and manufacturing at 48.0 – the index convention is a reading over 50 suggests growth. Encouragingly, the Eurozone PMI rose from 52.0 in February to 54.1 in March, with services reading at 55.6 and manufacturing at 47.1. These figures bode well for the Q1 GDP figures, and increase the likelihood that the UK and Eurozone may avoid technical recession this year. However, a divergence in performance is emerging between services and manufacturing, with the latter hit by a drop in new orders.

This week sees inflation data from the Euro Area where the difference between headline and core inflation will be in evidence. The headline figure is likely to fall, reflecting lower energy costs. However, we expect core inflation (which excludes volatile items like energy and food) to only slightly recede, due to ‘second round effects’, where firms pass on their increased costs to customers. That central banks have recently turned hawkish again reflects concern over this knock-on effect inflation.

Things to watch for this week

Wednesday 29th March

UK Mortgage Lending, February

Previous: £2.5bn
Forecast: £2.6bn

Mortgage lending fell in December and January, due to higher rates and concern over the market outlook. We are expecting a small increase in February following a rise in applications in January. However, lending remains subdued, and our forecast is for house prices to fall further this year.

GfK German Consumer Confidence, April

Previous: -30.5
Forecast: -28.5

German consumer confidence hit a low point of -42.8 in October 2022, but has steadily recovered as energy prices have ebbed. We are expecting confidence to edge up further due to the continued easing of inflation.

Thursday 30th March

Euro Area Economic Sentiment Indicator, March

Previous: 99.7
Forecast: 99.0

We believe this business confidence survey from the European Commission will report a fall for March, following a decline for the ZEW Euro Area index earlier this month.

Friday 31st March

Euro Area ‘Flash’ Inflation, March

Previous: 8.5%
Forecast: 7.3%

As last year’s big energy price increase drops out the index, inflation is set to fall further over the course of this year. However, the ECB will be closely watching core inflation, which we expect to fall either marginally or remain steady due to second round effects.

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