Optimism for the UK economy and property market

In our latest spotlight session, our CEO, John Goodall, was once again joined by David Smith, economics editor at the Sunday Times.

David spoke about the current shape of the UK economy and the property market, as well as his quiet optimism for its future.

Having last joined us when Liz Truss had just been appointed Prime Minister, David began by looking at the question posed last time of what her impact would be on prospects. In the immediate aftermath of her appointment, we saw the two-year energy price freeze, the sad death of The Queen, and then the infamous ‘mini-budget’.

“In some respects, we’re still recovering from that,” David said. “If you look at the data for the housing market and the mortgage market, it still reflects some of that uncertainty that kicked in as a result of the market chaos following that mini-budget.”

A fifth horseman of the apocalypse?

While things have settled down and ‘Trussonomics’ may now be a distant memory, David said it was an example of events having long-term consequences. In David’s view, the economy has seen its own four horsemen of the apocalypse in recent decades with the global financial crisis, the Brexit vote (and Trump’s trade wars), the pandemic, and most recently, the Russian invasion of Ukraine.

With ongoing pressures on US regional banks in particular, David suggested whether the banking crisis could become a fifth horseman. However, he was quick to say he didn’t predict another 2008.

“It seems to be a consequence of the adjustment we’re seeing quite widely to higher interest rates,” David explained. “There is tension here and uncertainty, and in the end, banking is all about confidence. While I don’t think this is 2008 all over again, I do think this will have a bearing on lending standards and on the availability of funds.”

The UK outlook

While the UK economy is “just about” back to pre-pandemic levels, David said the Russian invasion scuppered any prospect of a strong recovery. Issues such as the energy price spike and supply chain difficulties are starting to ease. However, labour shortages and the higher cost to borrow with the tightening policy of central banks still present challenges.

Although not expecting “great shakes”, David was optimistic about the growth outlook for the UK. With the help of lower gas prices and the economy under new management, the pound is recovering. Also, neither the Bank of England or the Office for Budget Responsibility (OBR) predict a recession and some forecasters are even suggesting a small rise in GDP this year.

“Inflation is of course the problem,” David said. “We are on the cusp of it coming down quite sharply.”

Having said it was “pretty likely”, David rightly predicted that the Bank of England would raise interest rates at the most recent meeting of the MPC. But, while it could be the peak at 4.5%, David wouldn’t rule out any further moves in the future if inflation persists.

Property prospects

Looking at the housing market, David highlighted that it has shown signs of stabilisation following the autumn shock. If anything, it has been a story of adjustment, not just to higher mortgage rates but also to the sudden shock of last autumn and the realisation of “a new environment.”

As the initial shock subsides, consumer confidence has started to recover from the lows witnessed during the autumn and winter, where it fell to the lowest level ever recorded by the Gfk barometer. However, it is important to note that consumer confidence remains weak due to a significant decline in household real incomes. Nevertheless, the housing market benefits from the support of low unemployment, which acts as a mitigating factor against a major housing correction.

“As long as unemployment remains low and individuals maintain realistic expectations within this new mortgage rate environment, the outlook for the housing market is much more promising than it appeared just a few months ago,” David affirmed. “We have witnessed the resilience of the housing market over the past couple of years, and while some correction is possible, it is likely to be modest.”

While David expresses optimism, he also advised staying vigilant and hopes that the UK avoids any further shocks and surprises, particularly those that could impact the banking system.

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