Supplement 270823 – Now and the next 18 months

Aug 27, 2023

“The bad news is nothing lasts forever. The good news is nothing lasts forever.” J. Cole, American songwriter.


Welcome to the Supplement everyone. Only one week left of silly season proper (well, four days if you include the bank holiday). 


The macro news is therefore very limited (in the UK anyway). The trend has continued on both the Purchasing Managers Indices which get real time information from large producers and service providers. 


Both dropped as they have been doing in recent months and the services number (which is much more important in terms of its weight on the economy) slipped below 50, equalling its low print in January, which had been the lowest print since early 2021. 


As you know I also like to look at where these numbers were versus the forecasts and both goods and services missed the forecasts by some way, so these numbers are bad news and look like the start of a sharp economic slowdown. However – it is August so let’s not panic too quickly. I suspect as alluded to earlier this year that this has been the most “traditional” summer for several years and so this might have caught the forecasters out.


What we can say is that it isn’t good news, unless you are still heavily sweating the 5 year bond yield and the swap rate, as I know many are. Economic slowdown leads to lower inflation and interest rate cuts (usually) although this logic doesn’t hold as quickly as it usually does when inflation is so far above target still. Either way, it was enough for the bond markets to tick downwards and the swap market closing at 4.83 for the week is nearly a quarter of a percent cheaper than last week – although still at least half a percent higher than a comfortable level.


You may also have seen headlines calling for tax cuts as the UK borrowed less than expected last month. This is relatively insane since we just paid the highest interest payment we’ve ever paid, as a country, since detailed records began.


Tax cuts are generally inflationary and whilst I am hurting along with all the other readers from the current tax regimen, now isn’t time for a responsible cut. Chatter has also started to refer to the election being September 2024 “at the earliest” so – being pragmatic – it’s still too early for an election bribe.


The autumn statement is speculated to contain subsidies and tax cuts nonetheless. Hunt so far hasn’t wanted to give much away and the response from the Truss/further right side of the party is really simple to understand in my view – their last chance of a tax cut for at least one parliament needs to be made the most of – so there’s speculation over whether Hunt will keep his job. Rishi hasn’t shown a lot of strength against this faction of the party but given he’s in the toaster at the very least, surely now is a time for pragmatism and strength.


The final roundup from the UK is the pressure on the construction sector – large housebuilders and smaller construction companies alike are struggling. There will be huge lobbying pressure on the next iteration of help to buy and perhaps Autumn will be the time to release that new scheme.


4000+ construction companies went insolvent in the past 12 months. Many have anecdotally commented and noticed that suddenly, alongside the agents, the builders are ringing around again to try and drum up business. Until deals stack up again, expect this to persist and THIS is the impact of the interest rate on the sector. Existing business is limping along or ticking over, but new business just doesn’t stack up like it used to.


There’s one slight positive from the personal (and tenant) perspective. Consumer confidence improved and beat forecasts as the price drop in July (that massive half a percent, remember?) seems to have eased consumer fears and the cost of living crisis.


That leaves us with a little room to contemplate how the next 18 months (or so) until the next parliament starts is likely to play out.


Rent still has all the ingredients to increase although I expect the upward pressure to ease around the middle of next year. I wouldn’t expect the last 12 months to be any kind of new normal but if we have seen a 12% increase in new rents (figures seem to vary between 10 and 14%), 7-8% wouldn’t be unusual and would be my best guess. After that point I expect things to settle down, but not back to where they used to be (I.e. below inflation) because margins will remain squeezed if rates stay within 1% of where they are now.


I think there will have to be a scheme looking like help to buy in order to support the construction sector, otherwise the party of the homeowner looks impotent and whilst chances are very slim for the next election, we can at least expect the incumbents to try and win I’m sure.


I expect limited relief for tenants although Sunak has been keen on progressive tax cuts and perhaps might increase the personal allowance alongside his goal of getting basic rate tax down to 19%. Wages are still going to plod along but again I’d expect that pace to slow back to 4-5% over the next year or so.


If Sunak removes his head from his rear end he will also remember that every election ever has been won in the middle. He should stop worrying about the far right of the party and get on with wooing the centre ground. That will take investment and the huge issues are energy and infrastructure. We need plans and spending to boot to create jobs and create an electricity grid that comes anywhere near the ambitions around net zero and the phasing out of diesel.


Onto more specific factors and I’ll stick with my prediction that we’ve seen the top of the swap rates but will bump around at perhaps 0.75% below where we are now as a best case scenario over the next year.


EPCs are still unlikely to be sorted since they still don’t know the answer but might make some big manifesto promises instead.


Rental reform still has time but the further right are clearly very opposed to it so that will be an arm wrestle and let’s face it, if you are arm wrestling then Michael Gove is the last person you’d want representing your team. There might be a reshuffle of course especially if Hunt does go and a “war cabinet” to try and win the election would sound sensible in theory, although the dearth of talent in practice will be the issue.


Will there be enough new homes? Enough new rental stock? Of course not because those structural difficulties will take many months of reversed trends to have any sort of meaningful impact. That is still likely to get worse before it gets better.


There is, of course, merit to the view that any more straws on the camel’s back in this time of higher or normalising rates could cause a further exodus and make the rental situation even worse. However, renters don’t vote Tory much anyway so where’s the political capital there?


At the moment at a high level Labour look to have a workable strategy and a massive advantage due to the last 13 years of achievements (or lack of them). They aren’t setting any worlds on fire though nor are they likely to, so their risk is that they just bore everyone so much to tears that there is a low turnout and when turnout is low, anything can happen.


The one tick in the Tory box is the easing cost of living crisis – in an irony that only a Brit could appreciate, we may be in recession yet the majority may well be much better off than they have been over the past 18 months or so. One eye will definitely be on unemployment though.


There’s only one racing certainty of course – and that is that the Supplement will still be here and the core message won’t change – Keep Calm and Carry On!