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Economic Overview – November 2018
Interest Rates and Inflation
As the deadline for Brexit edges ever closer, the future of UK base rate becomes even harder to predict. Whilst there has been much dialogue of a deal/no deal, each potential outcome will likely produce a different interest rate move.
Should we achieve a deal, and the UK manages a smooth exit from the EU, then ironically, the Bank of England has indicated there could be a faster pace of interest rate increases, with its latest forecasts suggesting rates could rise to 1.5% (so doubling from its current level) over the next three years.
Both consumers and business have taken a cautious approach since the Brexit vote, with a potential pent up demand building. That could in turn lead to a rebound in investment, potentially requiring interest rates to increase to dampen down potential inflationary concerns.
In its November inflation report, the Bank suggests that whilst pay is rising at a faster rate than anticipated, with gradual and limited interest rate rises, the Bank expects to bring inflation back to its stated target of 2% (but all subject to the nature of Brexit as discussed above).
The UK economy grew by 0.7% in the three months to August, buoyed by the hot summer (according to the Office for National Statistics (ONS)). However, in his budget, Philip Hammond downgraded his growth forecast for 2018 to 1.3% (from 1.5% in March) but raised his forecast for 2019 from 1.3% to 1.6%.
Figures from the European Union shows growth in the 19 countries using the Euro currency slowing by more than expected. Eurozone growth slowed to 0.2% from 0.4% in the previous quarter. Growth across all 28 countries of the EU fell to 0.3% from 0.5%. Italy’s economy came to a standstill in the third quarter of the year, registering no growth at all.
With the unemployment rate already at its lowest level since 1975, the Bank of England is forecasting the rate to fall even further, suggesting wage growth is expected to pick up as the demand and supply of labour becomes imbalanced with demand exceeding supply in many geographical areas as well as skill sets. Brexit uncertainty has seen a significant reduction in EU immigration, however rest-of-the-world immigration has picked up.
Homeowners are staying put during this time of economic uncertainty, leading to less demand for property and slowing house price growth. UK house prices rose at their slowest annual rate for more than five years in October, increasing by 1.6% (Nationwide Building Society). A typical home is now valued at £214,534.
Cash buyers have remained “buoyant”, and first time buyers have recovered to pre-financial crisis levels, mostly owing to government support through schemes such as Help to Buy. Recent tax changes targeting landlords and second home owners have cut the number of properties being let.