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Lower interest rates will fuel economic recovery
According to the ONS, retail sales volumes have been on a downward trajectory since April 2021, whereas retail sales values have been rising, which reflects the impact of inflation. Looking at the quarter to March 2024, retail sales volumes did increase by 1.9% compared to the previous three months, following the low sales volumes over the Christmas period. Going forwards, households benefitting from falling inflation and interest rates should support consumer spending. The short to medium-term economic outlook offers signs of cautious optimism. Downside risks remain, particularly in relation to geopolitical instability in the Middle East and eastern Europe, which could potentially fuel inflationary pressures. The timing of and scale of the Bank of England’s interest rate cuts are highly dependent on the trajectory of inflation and strength of the labour market in the coming months.
Economic backdrop After a challenging 2023, the UK economy appears to be improving, with inflation falling and the Bank of England widely anticipated to commence base rate cuts in the second half of 2024. This expected reduction in interest rates should continue the positive momentum in terms of improving business, investor and consumer confidence, as the cost of debt and cost of living pressures continue to ease. Despite increases in long-term UK Government bond yields over the year, paralleled by similar rises in property yields, there are signs of stabilisation emerging. The economy has already recovered from the mild technical recession of 2023, with the Office for National Statistics estimating encouragingly strong GDP growth of 0.6% for the first three months of 2024. In terms of output, both services and production contributed positively to the recovery, recording growth of 0.7% and 0.8% respectively. Output from construction fell -0.9%, which somewhat reflects the bad weather conditions that affected the building sector during this period. In terms of expenditure, increases in the volume of net trade, household and Government spending contributed to economic growth. Inflation has fallen a long way from its forty-year peak of 11.1% in October 2022, with the annual increase in the consumer prices index in March 2024 at 3.2%. Core inflation (excluding energy, food and tobacco prices), which has been more stubborn, reduced to 4.2% in March 2024.
There has recently been some softening within the labour market, with the unemployment level increasing to 4.3%, and job vacancy numbers on a downward trend, however real wage growth is now positive and has remained so since June 2023. As at March 2024, wage growth in real terms was 2.0% per annum for regular pay and 1.7% per annum for total pay. The housing market has remained resilient in the face of rising interest rates, and house price growth has started to re-emerge, with new mortgage rates down from the peak of summer 2023. According to the Halifax House Price Index, house prices grew 1.1% in the year to April 2024. Widespread loan defaults and forced sales have not been a feature of this downturn, partly due to stricter lending criteria and high levels of employment in comparison to previous market cycles.
0.6% Increase in UK GDP in the three months to March 2024
Picton Property Income Limited / Annual Report 2024 24
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