Rates are falling and activity is rising, so why aren't we enjoying ourselves?
Making sense of the latest trends in property and economics from around the globe
4 minutes to read
Interest rates are falling across Western economies, easing their stranglehold on battered but largely intact economies. So why aren't we enjoying ourselves?
This scenario has looked unlikely on many occasions during this period of elevated interest rates, to put it mildly, but consumer confidence is dropping and businesses are putting investment plans on ice (see below). This is largely by design. Labour's persistent talk of fiscal black holes, hard decisions and rising taxes makes strategic sense: prepare the public for the worst in next month's Budget and perhaps they'll feel they got off lightly, but as could have been anticipated the effects are already being felt in the real economy.
The Bank of England, too, is keen to keep one foot on the brake for fear of resurgent inflation and appears happy to cede any first-mover advantage to the Federal Reserve. It will be fascinating to look back at how our institutions handled this moment.
Taking fright
Granted, business activity is still rising. September's flash PMI registered 52.9, down from the 53.8 posted in August but still above the neutral 50 reading. Activity has now expanded for eleven consecutive months, though the speed of the recovery moderated for the first time since June.
Prices charged across the private sector eased to a three-and-a-half-year low and employment growth slowed for a second consecutive month. The September data pointed to another month of robust new business gains, though "investment plans in particular are reported to have been put on ice pending clarity on the new government’s policies, especially towards taxation," said S&P Global Market Intelligence chief business economist Chris Williamson. "Hiring likewise has been stifled by business uncertainty about the near-term economic outlook ahead of the ‘budget’", he added.
Similar themes appeared last week in the the GfK Consumer Confidence Index, which dropped to a six-month low of -20 in September from August's -13.
"Following the withdrawal of the winter fuel payments, and clear warnings of further difficult decisions to come on tax, spending and welfare, consumers are nervously awaiting the Budget decisions on Oct. 30," said GfK consumer insights director Neil Bellamy.
Long sterling
The underlying strength of the UK PMI was at odds with the same report for the eurozone, which showed contracting output and reports of new business falling at the sharpest pace since January.
It looks likely the European Central Bank will be coaxed into cutting at a faster rate than policymakers would like, which contrasts with conservative comments from Bank of England governor Andrew Bailey yesterday. Traders are also ramping up bets on a second straight half-point cut from the Federal Reserve in November, following yesterday's weaker-than-expected consumer confidence data.
The combination of the two is fuelling gains in sterling, which rose to its strongest level against the euro since April 2022 yesterday. Options trading volumes for the pound versus the euro surged on Monday to around 300% above the five-day average, according to Bloomberg.
“With the BOE lagging the developed market central bank easing cycle and the incoming UK data for the most part holding up quite well, at least on a relative basis, expressing a bearish dollar or euro view via sterling makes sense,” Ray Attrill, the Sydney-based head of FX strategy at National Australia Bank told the newswire.
Active sellers
Much of the policy uncertainty ahead of next month's budget concerns the government's approach to taxing the wealthy, so it's understandable that we're seeing subdued activity at the very top of the residential property market - see Tom Bill on the super prime market here.
However, the rhetoric is hitting home in all sales markets. Sellers have been far more active than buyers during the past four weeks, according to Knight Frank data. The number of new prospective buyers in the four weeks to 14 September in the UK was 15% below the five-year average, while the number of market valuation appraisals (which are requested by owners looking to sell) was 12% higher.
Furthermore, there was an average of 6.7 new buyers for every new sales instruction in the same period, which compared to a figure of 16 in early January, underlining the strength of demand at the start of the year.
"Demand... clearly picked up as mortgage rates dropped, but sellers should be aware that buyer exuberance will be in short supply this autumn, particularly this side of the Budget," writes Tom Bill. You can read more here.
Contracting supply
The pace of recovery in residential sales markets will depend on the trajectory of rates and the government's handling of the economy, but a supply crunch is coming in any scenario.
Between April and June this year, only 7,609 housing projects were granted permission in England, the lowest level since records began, according to the latest government statistics out this week.
The number of planning applications brought forward by developers has fallen sharply, rather than councils rejecting a much higher percentage of applications. The approval rate for residential applications remains stable above 70%.
This has been driven by a weaker appetite to build in light of higher finance costs, a weaker sales market, rising build costs and planning delays. Anna Ward will be covering the data in much more detail in the residential development note, out tomorrow.
In other news...
‘Can of Ham’ sale tests demand for City of London skyscrapers (FT).