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The week ahead 31 July 2023 - Major economies report upbeat GDP figures

31 July 2023

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

Last week saw GDP figures for several major global economies, which mostly came in better than expected. The USA, the world’s largest economy, reported annualised growth of 2.4% in Q2, which is up on the 2.0% seen in Q1 and ahead of the 1.8% analysts had predicted. This was driven by business investment. In the Eurozone, Germany reported GDP flatlined in Q2 on a quarter-on-quarter basis, compared to -0.1% in Q1, although analysts had been expecting marginal growth of 0.1%. Interestingly, the figures for Q4 2022 and Q1 2023 were revised upwards, so the recession during that period was shallower than previously thought. Meanwhile, GDP grew by 0.5% in France (vs 0.1% in Q1) and 0.4% in Spain (vs 0.5% in Q1). Based on these initial figures, it looks probable the Eurozone GDP figure returned to growth in Q2, having stagnated in Q1.

A run of good news on growth at a time when inflation is elevated often prompts economists to say: “the good news is the bad news”, as it increases the chances of a central bank rate hike. Indeed, last week saw both the Fed and the ECB raise their policy rate by 25 bps each, and the Bank of England will probably follow suit this week. Nevertheless, there is a growing expectation in the markets that US rates are probably at their peak, and the ECB may only hike once more by around 25 bps. In the UK, several mortgage lenders cut rates on deals last week as a bigger than expected fall in inflation has persuaded them the peak for British interest rates might be lower than they had previously assumed. Were a consensus view to emerge in the autumn that rates had peaked, we could see more property investors return to the prime end of the market, resulting in a Q4 rebound for sales volumes. However, for the secondary market a turning point may be further away due to the ongoing headwinds facing the UK economy.

As mentioned, the Bank of England will this week hold its policy meeting, and UK inflation is both well above target and high in comparison to other major economies. While there are tentative signs the labour market is weakening, it is still tight by historic standards, creating the risk of a wage price spiral. Consequently, we believe a 25 bps hike is coming for the UK base rate, then depending on the next round of data, another 25 bps may be added at the September meeting.

Things to watch for this week

Monday 31st July

Euro Area GDP, Q2

Previous: 0.0%
Forecast: 0.2%

With better-than-expected growth in France, and Germany avoiding a further contraction, we expect the initial estimate for Eurozone GDP to show a return to growth in Q2.

Thursday 3rd August

Bank of England Policy Rate Decision, August

Previous: 5.00%
Forecast: 5.25%

While the latest UK CPI inflation figure was encouraging, at 7.9% it remains a long way above the 2.0% target. We are forecasting a 25 bps base rate increase.

Friday 4th August

Non-Farm Payrolls, July

Previous: 209k
Forecast: 189k

While the US labour market remains warm, we are forecasting the level of job creation to have slowed in July in the face of higher interest rates.

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