Vanessa Hale
Director, Research
Cautious sentiment but the fundamentals of the UK economy remain broadly positive.
Brexit is making gradual progress with details slowly being released. Theresa May has outlined the UK’s desired position with regards to the UK’s future relationship with the EU. However it is important to note this is just the government’s preferred position and has yet to be agreed by the EU and could therefore change substantially over the coming months. The recent announcements have also highlighted the lack of consensus within the government, seeing both the Brexit Secretary and Foreign Secretary resigning.
Looking beyond Brexit and concentrating on the UK economy, the National Institute for Economic and Social Research estimate that the UK economy grew by 0.2% in Q1 2018. Q2 has seen a higher growth of 0.4% and they expect this to improve further in Q3 (0.5% growth forecast). The reason for the higher growth as the year goes on is that Q1 growth was thought to have been hampered by bad weather whereas Q2 has seen boosts in consumer spending as a result of the warm weather, two bank holidays, the World Cup and a royal wedding. Furthermore, independent forecasts collected by Her Majesty’s Treasury (HMT) predict total growth by the end of 2018 ranging from 0.7% to 1.9%, with the average forecast being 1.4%. This outlook has been downgraded slightly from Q1 2018 (when the average outlook was 1.6% for 2018) but remains reasonable. As for the British Chamber of Commerce, they have also slightly downgraded their growth forecasts for the UK economy. GDP is expected to grow by 1.3% as oppose to 1.4% for 2018 and if this forecast is realised it will be the weakest growth since 2009. This downgrade is driven by a more conservative outlook for consumer spending, business investment and trade. They acknowledge that real wages are now rising, but so far the increases have been so negligible it will not translate into any growth in consumer spending. In addition productivity remains weak, which will also limit increases in real wages.
Rising costs for businesses (apprenticeship levy, business rates, living wage), coupled with the weak exchange rate, may still impact the domestic market, both by increasing costs for domestic firms and making imports more expensive. In April inflation was as low as 2.2%, the lowest rate in a year. However, since April it has crept up again and according to the latest figures from ONS currently stands at 2.3% with the slight increase attributed to rises in motor fuel and ferry tickets. Given that companies are expected to increase wages by 3.1% in 2018 it would mean earnings growth would slightly outpace that of inflation. This should help support consumer spending, a key driver of the UK economy.
The official bank rate was increased by 0.25% to 0.75% on the 2nd August 2018. The rate remains low by historic standards. Any additional rise in interest rate that may occur will likely be introduced slowly and steadily to eliminate economic shock.
Property Market Pricing
According to the Nationwide House Price Index, UK property prices grew 2.3% in the year to Q2 2018. Y-o-Y growth over the same period shows that on a regional basis the best performers have been: East Midlands (4.5%), West Midlands (4.3%) and Wales (4.1%). This level of growth is much lower than the best performing regions last quarter. Despite historically having one of the strongest growth rates in the UK, London continued to have the weakest growth in the country for the quarter (-1.9%) and is the only region to have experienced negative growth in Q2 2018.
Outlook & Forecast
Now that there have been some initial agreements reached on Brexit, attention can move towards trade negotiations. The route Britain takes with these issues will have large implications on the nature of Brexit and the future strength of the UK economy. The fundamentals of the UK economy remain broadly positive, but sentiment remains very cautious.
Total transaction levels for England and Wales look to be relatively equivalent to this time last year. However, in PCL despite transactions picking up over the course of 2017, they continue to be low by historic standards. With substantial economic and political uncertainty continuing, it doesn’t look likely that this will change any time soon.
The forecasts for UK and PCL performance have remained the same. In PCL the best-case scenario of the falls seen in the first half of 2018 being recouped during the second half of the year, thus finishing with 0% growth over the course of the year. The risk remains on the downside however, with the downside risk scenario of -5% growth for 2018. Realistic pricing and the continued attractiveness of Sterling will continue to be key factors affecting market activity levels in the higher price sectors. We expect this stagnation in prices to persist for the remainder of 2018 with the possibility of further negative growth as both globally and domestically the economy and political environments remain volatile. From 2019 onwards it is extremely difficult to forecast this market with any certainty but we would expect some bounce back once more stability has returned.
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