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UK was in a technical recession in second half of 2023. Mortgage approvals rebounds in January for a strong start to 2024.
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The BSA's monthly Market Updates summarises issues affecting the main markets in which BSA members operate. The January edition discusses the headwinds faced by the UK economy in 2022, and the latest developments in the mortgage and savings markets.
HEADLINES
UK GDP growth weakens ahead of significant headwinds in 2022
Tight labour market conditions and rising inflation sees MPC increase Bank Rate
Mortgage market holds up in November with growth in remortgaging market
No growth in savings balances in November as households resume spending
UK economy faces significant headwinds in 2022
The UK economy is growing but at a slower rate than previously expected, even before the advent of the Omicron variant. In the third quarter of 2021 GDP growth was 1.1%, which is lower than first estimated at 1.3%. Household consumption was the largest contributor, growing by 2.7% in the quarter. This reflected the easing of Covid-19 restrictions. People returned to spending on services such as restaurants, hotels and travel, switching away from spending on goods such as clothing, food and drink. There were other signs that households were returning to more normal behaviours. Data from the Bank of England shows that household borrowing picked up in October and November, and saw the first increase in consumer credit on an annual basis in November since March 2020. In addition the saving ratio fell to 8.6% in Q3 2021, the lowest since the pandemic begun, and down from a peak of 23.7% at the height of the pandemic in Q2 2020.
Business investment fell by 2.5% in the third quarter of the year, and is now estimated to be 11.7% below its pre-pandemic level. A combination of both Brexit and Coronavirus uncertainties has seen investment lag behind other developed countries for some time. However, according to a recent survey from the Bank of England, investment intentions were at a 14 year high in November. This increase in investment intention is likely to be driven by the super-deduction allowance introduced in the 2021 Budget where firms can cut their tax bill by up to 25p for every £1 they invest in qualifying plant and machinery. Business investment is expected to grow at its fastest pace for many years in 2022, albeit from a low base, which should boost economic growth.
However, the emergence of the Omicron variant in December will have dented growth prospects in the final quarter of 2021 and the first quarter of 2022. The services sector will be particularly affected, with many social gatherings cancelled over the Christmas period. Furthermore, households face a huge squeeze on their finances in coming months with large rises in gas and electricity bills combined with increases in national insurance and a freeze on income tax thresholds. This could have a significant impact on discretionary spending, and could see some of the savings built up over the pandemic used to supplement essential spending, especially amongst lower income households.
In the twelve months to November, CPI inflation increased by 5.1%, up from 4.2% in the twelve months to October. This was higher than expected by analysts, and driven by an increase in energy prices filtering through to rising transport costs. The rate of annual growth in total pay was 4.9% in the three months to October, which fell sharply from 5.9% in the three months to September and a peak of 8.3% in the three months to July. The higher rates in previous months was due to base and compositional effects, which have largely worked their way out of the latest figures. However pay growth remains higher than the pre-pandemic rate of 2.5% in the three months to March 2020.
In what was considered a surprise move by many the Monetary Policy Committee voted 8-1 to increase the Bank Rate from 0.1% to 0.25% in December. With the Omicron variant threatening to push the UK into another lockdown many had expected the MPC to hold the Bank Rate at 0.1%. However, just days before the MPC meeting the Committee were presented with data suggesting a tight labour market and evidence of persistent wage price inflation, combined with annual CPI above expectations. It was judged that this was sufficient for some monetary tightening to take place in December. The Bank expect CPI inflation to peak at 6% in April before falling back materially in the second half of 2022. The balance between inflationary pressures and economic stability are perhaps more finely balanced than we have experienced in many years, meaning monetary policy decisions far more challenging. However, as evidence emerges that the Omicron variant may have less impact on the economy than initially feared, attention will focus on indicators of the tightness of the labour market to see if general price inflation is feeding through.
You can download the full market update here which includes analysis of the mortgage and savings markets.