Picton Property Income Limited Annual Report 2023

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Signs of economic stability

0.1% Increase in UK GDP in the three months to March 2023

Households have been impacted by the cost of living crisis, soaring fuel and energy bills, lower real incomes and rising debt and mortgage costs. Retail sales volumes did rise by 0.6% in the three months to March 2023, however this is the first rolling three- month increase since August 2021. It is hoped that increased post- pandemic tourism will go some way to compensate for weak domestic consumer demand in 2023. The Consumer Price Index (CPI) rose by 8.7% in the 12 months to April 2023. This is the first month that consumer price inflation has been below 10% since August 2022. As inflationary pressures start to reduce, households are expected to increase spending power, helping to drive the economic recovery. In terms of business confidence, the S&P Global/CIPS UK Composite PMI saw the longest period of decline since the Global Financial Crisis of 2007/08, experiencing six consecutive months of contraction to January 2023. This is due largely to the elevated cost of materials and labour putting pressure on profit margins, and higher financing costs hampering expansion plans. A sharp rebound began in February, and the latest data for April shows the Composite PMI was 54.9. Although job vacancies have declined from their recent peak, at 1.08 million, they remain elevated. The strong labour market has driven up average pay; however, in real terms, wages are not keeping up with inflation.

Economic backdrop After a tumultuous year, there are signs that the economic backdrop is beginning to stabilise. Geopolitical tension, the war in Ukraine, rising inflation, the cost of living crisis and the fall-out from the political events and Autumn mini- budget caused unprecedented volatility, high levels of market stress and economic headwinds. Following the end of the pandemic and the war in Ukraine’s impact on energy and commodity prices and supply chains, CPI inflation rose to a peak of 11.1% in October 2022. As a shock reaction to the Autumn mini-budget, ten-year Government bond yields increased by approximately 200 basis points in a month to reach 4.5% in late September and the value of sterling fell to historic lows. The Bank of England’s response was a series of interest rate hikes, with the base rate rising from 1.75% in August 2022 to 4.5% in May 2023. The ramifications of the increased cost of debt and rise in the risk- free rate have been multifaceted, from the impact on pensions, investment markets and property yields, to house prices, retail sales and consumer and business confidence.

At 3.9%, unemployment is very low by historic standards, having risen only slightly from a 50-year low of 3.5% in August 2022. The economic backdrop is now showing positive signs of stabilisation and even recovery. GDP growth has surprised on the upside, with the UK narrowly avoiding a recession in 2022. UK GDP is estimated to have increased 0.1% in the three months to March 2023. Inflation has been more stubborn than expected, owing largely to persistent growth in food prices. There have been improvements in supply driven inflation, as some of the production difficulties and supply chain issues faced by businesses have started to ease, leading to a fall in the price of imported goods. In addition, higher interest rates and the fall in households’ disposable incomes have dampened demand driven inflation and fuel prices have fallen significantly. Interest rate expectations have moderated compared to what was predicted in late 2022. Reduced uncertainty and falling inflation have allowed bond yields to stabilise, with ten-year Government bonds now at around 4%.


Picton Property Income Limited Annual Report 2023

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