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2023 could be the year of recovery for the UK

It might be a little too early to talk of spring buds but the green shoots of recovery may not be too far away.

When winter began, talk in the mortgage market was concentrated on the impact Kwasi’s Kwarteng’s disastrous “mini”-Budget was having on the UK’s financial stability.

Fast forward two months and the outlook has improved significantly. Five-year swap rates may have risen slightly over the last day or so, but at the end of January they dropped below 3.5 per cent for the first time since September 2022 – falling as low as 3.285 per cent.

Meanwhile, two-year swaps have fallen to 3.944 per cent, down from 4.357 per cent in December 2022.

These figures are evidence of increasing market stability and offer hope that rates will not reach the highs predicted last autumn.

So what has changed in recent weeks? Firstly, inflationary pressures are beginning to ease slightly.

Wholesale gas prices have fallen to below levels seen before Russian’s invasion of Ukraine.

And this should eventually feed through to lower bills for households. Petrol and diesel prices have also dropped sharply from their summer high.

Meanwhile, the latest figures from British manufacturers, show that factory output prices unexpectedly fell 0.8 per cent in December, the biggest decrease since April 2020.

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Although inflation remains more than five times above the Bank of England’s 2 per cent target, it has fallen for two consecutive months and there are signs that it is heading towards single digits.

As well as an improved inflationary outlook, the pound’s recovery and the performance of the London Stock Exchange are also signs that investors have more faith in the UK economy and its recovery than some sections of the mainstream media.

Lenders will be keeping a close eye on all these key indicators to get a sense of what is to come.

Clearly we are not out of the woods yet; household finances are still under significant strain with real wages falling and the prospect of higher interest rates.

But the good news is that the expected peak in interest rates may not be as far away as was predicted in the autumn.

Forecasts now put the ceiling for base rate at 4 per cent to 4.5 per cent. This means we may only be one, or possibly two, rate rises away from a levelling off.

My sense is that the outcome is already baked into swap rates, meaning mortgage rates may also have reached their peak in the current cycle.

Read about the UK Housing Market via our Specialist Residential & Buy to Let Division.

We are already seeing lenders start to reduce rates, with the best five-year deals for landlords back under 5 per cent, albeit with higher fees.

Renewed competition among lenders combined with improved swap rates and a less gloomy economic outlook should help to stabilise the market and could even push rates down further.

In turn this will help to improve affordability issues for landlords. Stress tests were tightened significantly as rates began to rise, which restricted buy-to-let borrowing, but they are now beginning to ease.

No one knows exactly what’s around the corner, but there is a sense that with spring on the horizon the most turbulent days are behind us.

Events of the past six months mean conditions are not going to return to ‘normal’, but the market and the UK economy is showing signs of resilience.

Let’s hope 2023 is a year of recovery.

By Phil Riches

Source: FT Adviser

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Confidence in UK Economic Growth Jumps by 21%

Investor confidence has surged into the Lunar New Year after China lifted its drastic Covid restrictions and hopes have risen that the end to interest rate hikes may finally be in sight while there have been signs economies may prove more resilient in the downturn.

Stocks on Wall Street rallied on Friday, spilling over into gains for the Nikkei, although many other Asian indices remained closed for the holiday.

Investor confidence has jumped 12% according to the Hargreaves Lansdown survey which tracks sentiment every month.

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The FTSE 100 has opened marginally higher, as quiet optimism continues to swirl.

Relief that inflation is finally past its peak is palpable, and there has been rash of data showing central bank policies aimed at dampening down demand appear to be working.

We’re in the era when bad news is good news, with the snapshot of a depressed housing markets in the United States showing home sales activity was at a 12-year low, helping set off a rally in equities on Friday.

Comments by Fed Governor Christopher Wallace were another salve for markets given that he indicated that falling prices combined with expected smaller rate increases, should do the trick of taming inflation, adding to hopes the end to the hiking cycle is close.

The comments also helped soften the dollar again, which will relieve further pressure on nations importing commodities priced in the greenback.

Guarded but slightly more upbeat analysis of the UK’s prospects by the governor of the Bank of England Andrew Bailey has also injected a shot of optimism.

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The HL survey shows confidence in UK economic growth has risen by 21% compared to last month.

Although it’s still down 24% compared to last January, it’s jumped by 75% compared to September when the Trussenomics mini-budget sparked market mayhem.

With financial stability returning and the forecast recession now expected to be shallower, optimism is returning that the economy will manage to tread water rather than sink in the year ahead.

Falls in energy prices over recent months have also eased some of the pressure on companies and consumers but there is still a note of caution from the European Central Bank that robust rate rises will be needed in the months to come.

ECB governing council member Klaas Knot indicated in a broadcast interview that the Bank would not be able to press pause on rate hikes any time soon given the risks inflation still poses.

This pushed the euro up sharply to 1.09 against the dollar, a level not seen since April 2022.

Crude oil ticked down a little but is still up around 12% since the start of the year with Brent Crude trading at $87 a barrel.

With fresh interest rates to come and energy prices staying elevated as hopes rise that demand in China will snap back, the months ahead may still prove tough for European companies, who may struggle to pass on prices to cash-strapped consumers.

By SUSANNAH STREETER

Source: Property Notify

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UK lending figures point to cooling economy, market turmoil

LONDON (Reuters) – Lending to British consumers rose last month by less than expected and the number of mortgages approved by British lenders eased back, according to Bank of England data on Monday that point to tougher times ahead for Britain’s economy.

The BoE said net unsecured consumer credit rose by 745 million pounds ($861 million) in September, the smallest monthly increase since December 2021, following a 1.215 billion pound increase in August. A Reuters poll of economists had pointed to net lending of just under 1 billion pounds.

Mortgage approvals totalled 66,789 last month, down from 74,422 in August, the BoE said, broadly in line the forecast in a Reuters poll.

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“September’s money and credit figures point to further signs that consumers have been become more cautious in response to the weakening economic outlook,” said Ashley Webb, UK economist at consultancy Capital Economics.

The BoE figures showed a huge jump in the money supply, which on the M4 measure rose by 2.1% in September alone.

The last time there was a bigger increase was in March 2020, when financial market turmoil early in the COVID-19 pandemic led to a squeeze on money market funds which had to sell assets such as government bonds and Treasury bills for cash.

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September’s jump likely reflected a fire-sale of pension fund assets to meet collateral calls in the wake of the ill-fated Sept. 23 economic growth plan, from the government of former Prime Minister Liz Truss.

The sub-category of M4 which covers companies like pension funds and life assurance firms jumped by a record 67.8 billion pounds in September, more than double the previous record.

Source: UK Investing

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Pound’s weakness could boost overseas investment in ‘resilient’ Scots property market

Sterling’s weakness could boost overseas investment in a “resilient” Scottish commercial property market, industry experts believe.

Property consultancy Knight Frank found that investment volumes in commercial property north of the Border rose by 37 per cent during the first nine months of 2022 compared to the same period last year, increasing to £1.46 billion from £1.06bn.

Offices were the most popular asset type, accounting for just over one-third of total investment volumes. Investment in industrial property almost doubled, from £157 million to £300m, as interest levels in the sector continued to increase following the pandemic.

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The research found that overseas investors remain the most active buyers of Scottish commercial property, accounting for 53 per cent of investment volumes. UK property companies increased their investment levels from £312m last year to £518m in the latest nine-month period.

Investment volumes in Aberdeen more than doubled from just over £54m in the first nine months of 2021 to £116.9m, buoyed by the sale of two retail parks. Edinburgh saw investment volumes increase 24 per cent to £415m, while Glasgow increased by 6 per cent to £377m.

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Alasdair Steele, head of Scotland commercial at Knight Frank Scotland, said: “There has been a great deal of uncertainty this year, starting with the complications of the ongoing pandemic, the conflict in Ukraine, and rising inflation and interest rates, but Scotland’s commercial property market has continued to fare well. This is particularly true for assets that are in high demand, namely prime offices and industrials – but alternatives, particularly hotels, are increasing in popularity.

“The summer period was relatively quiet after a flurry of deals were completed in the lead up to June. However, as we move into the final quarter, there remains a significant amount of dry powder waiting to invest and commercial property is traditionally seen as offering a good hedge against inflation – particularly for overseas investors, with the pound’s current weakness. We could see them take an even more active interest in the market in the remainder of 2022 and into next year.”

He added: “We anticipate a busy end to a challenging year, provided the macro-economic situation does not change materially and the right stock is made available.”

By Scott Reid

Source: The Scotsman

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Mini-Budget: IR35 will be repealed from April

The IR35 reform will be repealed from April 6, 2023, according to this morning’s mini-Budget.

Speaking to the House of Commons today (September 23), Chancellor Kwasi Kwarteng said from April, workers across the UK providing their services via an intermediary, such as a personal service company, will once again be responsible for determining their employment status and paying the appropriate amount of tax and NICs.

Kwarteng also used today’s mini-Budget to scrap the additional rate of income tax and cut its basic rate to 19 per cent in a series of tax cuts which amount to £45bn.

The 2017 and 2021 reforms to the off payroll working rules – also known as IR35 – were a tax law that required the end client, and not the contractors they hire, to decide if the working relationship resembles a self-employed engagement or employment.

Under existing rules, the fee-paying party (either the end client or recruitment agency) shoulderd the liability.

The aim of the reform was to stop the promotion and misselling of disguised remuneration schemes, however the legislation has received criticism.

Kwarteng has repealed these reforms as part of the first steps in taking complexity out of the tax system.

He said: “To achieve a simpler system, I will start by removing unnecessary costs for business. We can also simplify the IR35 rules and we will. In practice, reforms to off-payroll working have added unnecessary complexity and cost for many businesses.

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“So as promised, by the prime minister, we will repeal the 2017 and 2021 reforms. Of course, we will continue to keep compliance closely under review.”

The changes will mean workers will once again be responsible for determining their employment status and paying the appropriate amount of tax and national insurance contributions.

This will free up time and money for businesses that engage contractors which the chancellor said could be put towards other priorities.

The reform also minimises the risk that genuinely self-employed workers are impacted by the underlying off-payroll rules.

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IR35 reforms
In August, prime minister Liz Truss gave an interview where she indicated she would review the IR35 reforms.

The reforms were introduced in April 2021 to the private sector, and means that the responsibility for assessing whether a contractor is self-employed or employed is now with the end client, and not the contractor themselves.

The liability, and therefore financial risk, was also transferred to the fee-paying party.

The changes have been branded “a mess”, “unpopular” and “puzzling”.

The controversy surrounding the changes prompted the former chancellor, Sajid Javid, to pledge a review of IR35 as part of the Conservative party’s manifesto in the lead up to the general election.

By Sonia Rach

Source: FT Adviser

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UK inflation doubles in April as lockdown restrictions ease

UK inflation has more than doubled in April as energy and clothes prices pushed the consumer price index up to 1.5% amid the easing of lockdown restrictions.

A rise from March’s 0.7% readout, the figure comes more in line with the Bank of England’s expected rate of 2% by the end of the year.

Statistics published by the Office for National Statistics (ONS) identified rising household utility, clothing and motor fuel prices as the biggest drivers of the increase which was still partially offset by a large downward contribution from recreation and culture.

Gas and electricity saw big jumps with price rises of 9.4% and 9.1% respectively between March and April driven by a spike in global demand for wholesale gas.

A bounce in oil prices from $20 per barrel last year to around $70 today also put pressure on inflation and will continue to do so as demand increases as the global economy opens up again.

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Ambrose Crofton, global market strategist at JP Morgan Asset Management, said that “a confluence of factors including Brexit-related trade frictions, rising commodity and freight prices are adding cost-push pressure” to the manufacturing side of the economy.

End of furlough scheme could keep inflationary pressures at bay

Inflation is likely to increase further throughout the year as “the economy gradually reopens, the recovery picks up steam and supply constraints intensify in the sectors that were hit by the pandemic,” according to Silvia Dall’Angelo, senior economist at the International Business of Federated Hermes.

Dall’Angelo said higher wholesale gas prices could lead to hikes in regulated utility prices later in the autumn, pushing CPI inflation close to 3%.

But she notes that as inflationary drivers are “set to be largely cost-push and hence temporary” with residual disruption to the labour market likely to show up at the end of the furlough scheme in September, underlying inflationary pressures could be contained.

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Economic recovery could be a Trojan horse for inflation

However AJ Bell financial analyst Laith Khalaf said that “at current levels, UK inflation is nothing to fret about, but there is rising concern that the fiscal and monetary response to the pandemic has sown the seeds of an inflationary scare further down the road.”

The Bank of England showed no signs of tightening the reins just yet as it announced it would make no changes to monetary policy earlier this month with interest rates remaining at 0.1% for now despite its improved economic forecasts.

Khalaf said: “For the moment, the Bank of England is dismissing consumer price increases as a natural bounce back from the depths of the pandemic last spring. But the economic recovery could be a Trojan horse, smuggling inflation into the UK, right under the nose of central bankers.”

Khalaf noted that inflationary fears are already starting to creep into the market with the 10-year gilt yielding 0.9%, up from 0.2% at the beginning of the year.

Despite this Oliver Blackbourn, multi-asset portfolio manager at Janus Henderson, notes real yields “remain very negative as guidance about interest rates continues to hold down nominal yields, even in the face of expected strong growth and rising inflation”.

“While breakeven rates on UK gilts are towards the upper end of where they have been over the last two decades, it is not clear that they are at a level that should be unduly concerning for the Bank yet.”

By Harriet Habergham

Source: Portfolio Adviser

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Bank of England predicts 7.25% growth in economy as interest rates held at 0.1%

The UK’s economy could grow by more than 7% in 2021, according to the latest Bank of England forecast – the fastest pace since the Second World War.

Their projection is that the UK gross domestic product (GDP) – a measure of the size of a country’s economy – will rebound by 7.25% and mark the best year of growth since official records began in 1948.
This represents a sharper recovery than the central bank’s previous forecasts, with 5% growth previously expected.
It comes after the pandemic saw the UK suffer the biggest drop in output for 300 years in 2020, when it plummeted by 9.8%.

But the Bank’s quarterly set of forecasts showed it downgraded its growth outlook for 2022, to 5.75% from 7.25%.

The rosier view for the economy this year came as the Bank’s Monetary Policy Committee (MPC) held interest rates at 0.1%.

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The Bank kept its quantitative easing programme on hold at £895 billion, although one member of the MPC voted to reduce it by £50 billion given the brighter recovery prospects.
In minutes of the latest decision, the Bank of England said the lockdown is set to see GDP fall by around 1.5% – far better than the 4.25% drop first feared.

It also sharply cut its forecasts for unemployment over the year.

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The Bank said: “GDP is expected to rise sharply in 2021 second quarter, although activity in that quarter is likely to remain on average around 5% below its level in the fourth quarter of 2019.

“GDP is expected to recover strongly to pre-Covid levels over the remainder of this year in the absence of most restrictions on domestic economic activity.”

But it warned over “downside risks to the economic outlook” from a potential resurgence of Covid-19 and the possibility that new variants may be resistant to the vaccine.

Source: iTV

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BoE’s Haldane says UK recovering ‘faster than anyone expected’

Britain is recovering faster than anyone had expected from the economic impact of COVID-19, but businesses need better incentives and access to finance to invest in technology, BoE’s chief economist Andy Haldane said.

“UK GDP had, by July, recovered around half of its Covid-related losses, rebounding further and faster than anyone expected,” Haldane said in an article for the Mail on Sunday newspaper written jointly with the former chairman of John Lewis Partnership, Charlie Mayfield.

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Britain’s central bank said in a policy statement on Thursday the economy was recovering faster than it had forecast in August, though prior to that several policymakers had struck a more cautious tone than Haldane.

Haldane said he was writing in his capacity as chairman of a government commission to boost economic productivity.

Reporting by David Milliken; Editing by Chris Reese

Source: UK Reuters

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UK economy grows 6.6 per cent in July as recovery continues

The UK economy grew 6.6 per cent in July as it bounced back from the coronavirus lockdown of the spring, setting the stage for rapid GDP growth in the third quarter, official figures showed.

The growth was slower than the 8.7 per cent expansion seen in June, however, and was from a low base after the historic collapse in output in the second quarter.

“While it has continued steadily on the path towards recovery, the UK economy still has to make up nearly half of the GDP lost since the start of the pandemic,” said Darren Morgan, director of economic statistics at the Office for National Statistics (ONS), which released the figures.

In July, the UK’s all-important services sector grew 6.1 per cent. It makes up around 80 per cent of the economy. The sector was boosted by the reopening of pubs and restaurants at the start of the month.

Production, which includes manufacturing, expanded by 5.2 per cent. But construction shone, growing a huge 17.6 per cent after expanding by 23.6 per cent in June.

Nonetheless, July output in the massive UK services sector remained 12.6 per cent lower than in February despite the quick GDP growth. And rising coronavirus cases could derail the recovery.

Chancellor Rishi Sunak said: “Today’s figures are welcome.” But he added: “I know that many people are rightly worried about the coming months or have already had their job or incomes affected.”

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“That’s why supporting jobs is our first priority.” He flagged the Eat Out to Help Out scheme, VAT cuts and the £1,000 retention bonus for jobs brought back from furlough.

UK economy 11.7 per cent smaller than in February

Some parts of the services sector were running at almost full capacity. Output in wholesale and retail trade rebounded to higher than its February level. Financial and insurance activities and real estate were only slightly off.

But other sub-sectors lagged far behind, highlighting the unequal effect of the coronavirus crisis.

Output in accommodation and food services grew strongly but was nonetheless only running at 40 per cent of its February level in July. Arts, entertainment and recreation was also well off.

Tej Parikh, chief economist at the Institute of Directors business group, said: “The economy continued its rebound in July, but the hard part is still to come.

“The recovery will start to hit speed bumps into the end of the year. Local lockdowns and new restrictions heap uncertainty on businesses, and demand remains limited in many areas.”

The ONS said the UK economy was 18.6 per cent bigger in July than it was at its April low.

Yet in July UK GDP remained 11.7 per cent below its level in February, before the full impact of the coronavirus pandemic.

GDP recovery ‘likely to stall’

Samuel Tombs, chief UK economist at consultancy Pantheon Macroeconomics, said growth was likely to be strong in August and September.

He said it would be “assisted by far greater than usual numbers of people staying in the UK during the summer holiday season” and “the full reopening of schools”.

But he said: “Thereafter, the recovery likely will stall if, as looks likely, new Covid-19 infections continue to rise.” Tombs said that would keep “people working from home and avoiding consuming services that require close human contact”.

Coronavirus cases have risen sharply in recent days. The number of daily new cases has consistently been just below 3,000 this week, whereas they were consistently half that the week before.

In response to the spike, the government has limited the number of people who can meet socially to six.

Yael Selfin, chief economist at auditing giant KPMG, said: “The risk of a second wave of infections in the autumn could derail the nascent recovery and put the economy into a lower gear.”

By Harry Robertson

Source: City AM

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Bank of England: UK economy ‘likely’ to need further stimulus

Bank of England interest rate-setter Michael Saunders said today that it was “quite likely” that more stimulus will be needed for Britain’s Covid-hit economy in a downbeat speech on the outlook.

“I consider it quite likely that additional monetary easing will be appropriate in order to achieve a sustained return of inflation to the two per cent target,” Saunders said.

Growth was likely to disappoint relative to the Bank’s forecasts published last month, Saunders said.

He said an ongoing recovery was the result of a “benign window” – the combination of huge government spending and the relaxation of lockdown measures.

“This window may now be closing,” Saunders said, adding that a downside scenario for the economy would be “very costly”.

Saunders said the withdrawal of the government’s furlough scheme at the end of October was likely to lead to a spike in unemployment.

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“Unemployment is likely to rise significantly in coming quarters as the furlough scheme winds down and workforce participation recovers,” he said.

“The scale of the projected rise in unemployment (about 3½ percentage points) is similar to that seen in 2008-11, but it occurs much faster. Indeed, it would be, by some distance, the sharpest rise in unemployment for at least 50 years.

“While there are uncertainties around that forecast, my view is that the picture of a sharp rise in unemployment is – sadly – highly plausible,” he added.

On Wednesday, the Bank’s deputy governor Dave Ramsden and another rate setter, Gertjan Vlieghe, also warned the economy could suffer more damage from the coronavirus crisis than spelt out by the central bank last month.

Many economists expect the Bank to announce a ramping-up of its bond-buying programme in November.

By James Booth

Source: City AM