Strutt & Parker realigns forecasts at mid-year point Short supply and economic conditions will see rate of growth slow
Whilst the UK has overcome the fallout from COVID-19 alongside a successful vaccination rollout, focus has firmly moved to the growing cost of living crisis and the news of the UK Prime Minister, Boris Johnson’s resignation leaving UK politics facing uncertainty until his successor is decided. Tax changes, net zero commitments, defence spending, cost of living challenges, immigration and ‘delivering Brexit’ are at the heart of the policy pledges of his potential successors.
The outlook for the economy is uncertain, as global economic conditions have worsened with the ongoing geopolitical situation, which could cause more disruption to global energy and food markets.
The resulting inflationary pressures, weaker growth and tighter financing conditions will make it harder for households and businesses to repay or refinance debt as well as being more vulnerable to economic shocks. The UK economy is feeling this, with 88% of adults in Great Britain reporting an increase in their cost of living in May 2022. Furthermore, in its March 2022 forecasts, the OBR expected household incomes after tax and adjusted for inflation to start falling in Q2 2022 and to not recover until Q3 2024.
Confidence in the post-pandemic recovery of the global economy continues to be negatively impacted by the ongoing geopolitical situation in Europe. The situation has caused great uncertainty amongst markets, businesses, and consumers. The latest Business Confidence Monitor shows business confidence weakening again, with firms facing significant supply-side challenges. Furthermore, GfK’s Consumer Confidence Index set a new record low in June with an index score of -41, largely driven by a fall in confidence over the general economic situation over the last 12 months. A stringent set of economic sanctions has placed additional constraints on the global supply of energy. This is in addition to the initial rise in UK energy prices, as a nationwide increase in the energy price cap came into effect in April 2022.
The heightened cost of living is reflected in the latest inflationary figures from the ONS, with the CPI rising by 9.4% in the 12 months to June 2022 – this is the highest CPI 12-month inflation since records began and already exceeds forecasts. The latest OBR forecast in the Spring Statement (March 2022) forecast that inflation would peak at a rate of 8.7% by Q4 2022, double the forecasted peak in the October 2021 Autumn Statement. In response, the government has announced a £37 billion support package, including a £400 energy grant for all households and payments of £650 to households on means-tested benefits.
In response to surging inflation, the Bank of England increased the interest rate from 1% in May 2022 to 1.75% in August 2022 – the highest since 2008. It is the fifth increase since rates were slashed at the start of the pandemic. The Monetary Policy Committee at the Bank of England has also started to reduce the size of its Quantitative Easing package, which was initially expanded at the start of the pandemic. Official forecasts expect further rises in rates over the next four or five years, as the Central Bank has vowed to start getting prices down and making life more affordable again. The rate increases are expected to be factored into new fixed-rate mortgage deals, whilst variable-rate mortgage holders have already seen their rates increase to reflect the increasing bank rate.
The FTSE 100 started 2% higher at the beginning of this year (January 2022) than it left off in December 2021. However, the day of Boris Johnson’s resignation saw a 4% negative shock (compared to the start of the year); however, it was up by 1% compared to the day prior.
GDP estimates for Q2 2022 show the level of real GDP growth remains 0.7% above where it was pre-pandemic, indicating a full recovery. The latest HM Treasury forecasts (June 2022) report GDP growth of 3.8% over 2022; a significant downward revision from their January 2022 forecast of 7.1% as a result of the ongoing geopolitical situation. Similarly, the OBR’s latest forecast (March 2022), projected 3.8% GDP growth for 2022; 2.2 percentage points lower than the OBR October 2021 forecast. For 2023, HM Treasury predicts growth of 1.6%, slightly lower than the OBR which projects growth at 1.8%. The slow recovery predicted for 2023 has been tied to the “cost-of-living squeeze, withdrawal of fiscal support, and tighter monetary policy.”
HM Treasury consensus forecasts (June 2022) predict an average unemployment rate of 4.0% for 2022, increasing to 4.1% over 2023. These are on par with the OBR (March 2022) forecasts of 4.0% in 2022 and 4.2% in 2023. Unemployment stands at an almost 50-year low with 627,000 more people in payroll employment compared to pre-pandemic levels. That being said, it is said that at least 3.7 million people are in insecure jobs, up from 3.6 million in 2021.
At the end of Q1 2022, the value of the Pound to the Euro was c. £1.20, 13.3% lower than the 2015 average and a slight increase from the previous quarter (£1.18). Interestingly, the pound jumped as Boris Johnson announced his resignation, rising as much as 0.8% against the US dollar after a chaotic two days in which more than 50 government ministers resigned.
Overall, inflation and interest rates are rising, with this anticipated to continue over the years to come. The cost of living crisis is worsening, squeezing real wages and disposable incomes and putting more pressure on businesses. This is exacerbated by the war in Ukraine, which is causing global economic uncertainty and the UK’s political instability with the Prime Minister’s resignation. The economic uncertainty may result in a global slowdown that, in turn, might translate into decreased demand in the housing market and house price growth slowing. The total realised impact of the current political situation on the housing market will depend upon the decisions made in the coming months.