Chief economist discusses the economic outlook
Is the UK really going to miss a recession? It is a question many are asking at the moment, and understandably so - but a more pertinent question might be, what does the coming year mean for homeowners, recession or not?
Mortgage Introducer spoke to a chief economist to find out.
Is there going to be a recession in the UK?
James Sproule (pictured), chief economist at Handelsbanken, said there is an old economist’s joke about the doom-monger who has predicted ‘five of the last three crashes’.
“One reason it holds true is that the metric required for a recession to be declared is two quarters of consecutive negative growth, something that is ever more likely as our trend rate of growth has slowed over the past decade or so,” he said.
Equally, Sproule said while the effects of recessions can be catastrophic, and no-one who has lived through a deep one will be blasé about the risks, a shallow recession is not a reason to panic.
Handelsbanken’s present UK forecast is for slow growth, not a recession, but Sproule added that if the economy does shrink, it will not be by much.
“On a positive note, the Office for National Statistics has been busily upgrading our recent track record, admitting there has been more growth than expected,” he said.
Meanwhile, with the economic metrics looking slightly healthier than expected, and consumer spending being maintained, Sproule said we should avoid the dreaded ‘r’ word.
However, the difference between 0.1% of growth and shrinkage of 0.1%, Sproule said, is not going to necessarily translate into meaningful feelings of wealth.
So, whether we are officially in recession may, therefore, Sproule said, become something of a moot point.
How are households impacted by economic challenges?
For households with a mortgage, Sproule said interest rates remain one of the key issues, dictating how much money might be left over each month for other spending.
“We have just seen a run of 14 rate rises in a row, taking us from 0.1% to 5.25%, as the Bank of England tries to keep rampant inflation under control,” he said.
In practical terms, Sproule said this means for each £100,000 borrowed, the monthly cost has risen from less than £450 to around £650.
The good news, he added, is that economists and investors alike now think interest rates are at their peak. However, Sproule said the impact of rate rises is not instantaneous, and the expectation is that businesses and consumers will not adjust their behaviour until at least the middle of next year.
Inflation peaked at 11% last October, Sproule said, driven by a host of factors from energy prices spiking in the aftermath of Russia’s invasion of Ukraine, through to central banks having allowed monetary policy to remain far too loose for far too long over the last 15 years, in his opinion.
“The solution is not just a sustained period of higher interest rates to bring the spike of inflation down, but a ‘new normal’ that establishes money has a cost and inflation is not going to be allowed to grip the economy again,” he said.
How are house prices impacted by economic challenges?
The most common macro valuation metric, Sproule said, is the average house price to average income ratio, a metric which peaked at an all-time high in September.
“No all-time high can continue forever and this metric has since fallen as house prices have softened,” Sproule said.
This softening, he said, still has some way to run as the expectation is that we are only approximately half way through a peak-to-trough fall of around 8%.
However, Sproule said this is a nominal fall, so it does not take into account the effect of high inflation; in real terms, he added that the decline in house prices has been closer to 20%.
“Obviously this will be unwelcome news for many, but with house prices running well ahead of affordability, some form of correction was inevitable, and a bout of inflation is, perhaps, the least painful way for the correction to happen,” he said.
What most mortgage holders want to know is, Sproule added, what it means for them right now.
The good news, Sproule said, is that banks are flexible, and are providing a number of mechanisms to help customers.
“Banks want to be banks, they do not want to be the owners of large property portfolios; the best results will come from lenders working closely with their customers to understand their circumstances and what the best options are - foreclosure is always a last resort,” he said.
Based on all the current trends and Handelsbanken’s forecasts, Sproule expects the economy to see better growth coming through towards the end of 2024, or early 2025.
“It will be a rocky road to get us there; for the moment, the best way forward for borrowers and lenders alike is to maintain open and honest dialogue, and tackle problems before, and not after, they arise,” he added.
Do you believe the UK will enter a recession and how would this impact the housing market? Let us know in the comment section below.
