Households are saving more than usual, taking on less credit, and increasing ad-hoc mortgage repayments.
Firms also are choosing to delever; October’s net repayment of external finance was the second largest ever.
House purchase mortgage approvals fell sharply in October; we expect them to fall further this winter.
Samuel Tombs (UK Economist)U.K.
Incoming data are consistent with our forecast for a sharp fall in house purchases and an 8% drop in prices.
The MPC, however, won’t keep Bank Rate at 4% indefinitely; house prices should rebound in the mid-2020s.
Mortgage payments’ share of incomes will not return to 2010s levels; hefty rent rises have raised the floor.
Samuel Tombs (UK Economist)U.K.
- The OBR's forecast for the effective mortgage rate looks
implausibly high; we expect a smaller drop in RHDI...
- ...But its forecast for the saving rate to fall to a joint-record low, supporting spending, jars with past experience.
- The saving rate usually rises when the unemployment rate increases; rising rates will spur debt repayments.
Samuel Tombs (UK Economist)U.K.
- The U.K. is the only G7 country in which GDP fell in Q3
and has never recovered to its pre-Covid peak.
- Households’ real spending will keep falling until the end of 2023, as fiscal and monetary headwinds intensify.
- Higher interest rates will weigh on business investment and trigger a sharp downturn in residential investment.
Samuel Tombs (UK Economist)U.K.
- Timely data show house prices now are falling in the face of surging mortgage rates and falling real incomes.
- Supply is becoming scarcer, but it is not keeping up with cratering demand, we still expect prices to fall by 8%.
- Watch out for a jump in wage growth in September; many public sector workers received a 5% pay rise.
Samuel Tombs (UK Economist)U.K.
- Rising mortgage rates, energy prices and unemploy- ment will all drain the life from the economy next year.
- Real government spending will be strangled in each of the next three years, in order to get the debt ratio falling.
- A further rise in long-term sickness will be another un- welcome shock; no escaping a prolonged recession.
Samuel Tombs (UK Economist)U.K.
- Retail sales in September were 2.1% below their 2019 average level; don't blame the extra public holiday.
- The support to households' incomes from government policies will rise in Q4, then fall sharply next year.
- Incomes also will be hit in 2023 by mortgage refinancing and job cuts; expect retail sales to keep falling.
Samuel Tombs (UK Economist)U.K.
- Households have not materially depleted the additional savings they accumulated during the pandemic, yet.
- In real terms, excess savings no longer look impressive, and the distribution has worsened over the last year.
- Households likely will increasingly use savings to pay off debt, in response to the jump in mortgage rates.
Samuel Tombs (UK Economist)U.K.
- We now look for a 1.5% year-over-year drop in GDP in 2023, worse than our prior forecast for a 1.2% decline.
- The Energy Price Guarantee has shored up real in- comes, but the tax cuts are counterproductive, net...
- ...The hit from the resulting drop in sterling and rise in mortgage rates will outweigh the direct fiscal boost.
Samuel Tombs (UK Economist)U.K.
- PMI and confidence data for September suggest GDP edged down for a second consecutive quarter in Q3.
- The downturn will gather momentum, as borrowing costs for households and businesses soar.
- We now look for a 1.5% year-over-year decline in GDP in 2023, and CPI inflation not to return to 2% until 2025.
Samuel Tombs (UK Economist)U.K.
- A recession now is all but inevitable; the key questionis how the pain will be distributed.
- Hiking Bank Rate to 6% would crush domestically-generated inflation; mortgage defaults would soar.
- Hiking more slowly would depress sterling and boost imported inflation, but is the lesser evil for the MPC.
Samuel Tombs (UK Economist)U.K.
- The improved near-term outlook for CPI inflation has left the MPC less anxious about second-round effects.
- The MPC is awaiting more details on fiscal policy; a 75bp hike in November can't be ruled out...
- ...But the proposed tax cuts will do little to boost GDP, and spending might be cut; we still expect a 50bp hike.
Samuel Tombs (UK Economist)U.K.
- Public borrowing has tracked the OBR's forecast this year, but government spending now will soar.
- Loans to energy suppliers, to limit energy price rises, will boost the cash requirement, but not borrowing.
- We look for a gross financing requirement of about £325B in 2023/24, but the outlook is very uncertain.
Samuel Tombs (UK Economist)U.K.
- The effective interest rate for all mortgages has risen only slowly to date, but now looks set to soar...
- ...As a rising number of borrowers refinance, and as lenders respond to the further jump in risk-free rates.
- Expect a 1pp disposable income hit in 2023 if Bank Rate tops 4%, or a 0.7pp drag if Bank Rate tracks our forecast.
Samuel Tombs (UK Economist)U.K.
- The month-to-month change in the August core CPI exceeded its seasonal norm by the least this year.
- The recent decline in commodity prices suggests core CPI inflation will fall sharply next year.
- Services inflation will be stickier, but the current support from energy price rises and VAT changes will fade.
Samuel Tombs (UK Economist)U.K.
- CPI inflation likely fell to 9.9% in August, from 10.1% in
July, returning to the level forecast by the MPC.
- A slump in motor fuel CPI inflation likely dominated the further pick-up in food inflation.
- BRC data show the pace of core goods price rises eased in August; July's large jump in rents won't be repeated.
Samuel Tombs (UK Economist)U.K.
- Ms. Truss has been tight-lipped about her plans, but a
trade body plan to freeze prices is gaining traction.
- If implemented, CPI inflation will return to the 2% target in 2023, easing the pressure for further big rate hikes.
- Firms need help too, though we think Ms. Truss will cut business rates and provide grants, not reduce VAT.
Samuel Tombs (UK Economist)U.K.
