The UK economy is currently a swirl of mixed messages ranging from a better than expected economic outlook, via continued price and wage inflation and consumer concerns around mortgage payments and rents, and what the Bank of England (BofE) might do to kill off inflation. On top of this, we’ve seen some retailer failures, and potentially another winter ahead when heating costs could challenge household incomes.

At the start of 2023, the economic outlook was pretty bleak: the BofE was forecasting a shallow but sustained recession, the UK economy was predicted to be one of the worst performers in Europe, and a cold Q1 would wreck household food and energy budgets.

UK economy enters the ‘second round’

Six months on, you could argue that these negative concerns have disappeared. A recession is no longer the consensus view, last winter was warmer than expected, and wage growth has accelerated. However, we’re now struggling with the ‘second-round’ effects of some of these changes. 

From a retailer’s standpoint there are reasons to be cheerful. Generally, it appears that higher input and operating costs have, to some degree, been passed onto consumers and in some areas – notably business rates and rents - costs are lower. However, increases in turnover cut both ways in terms of operational costs and customers’ ability to pay higher prices. While the latest wage growth data surprised on the upside, the rise in unemployment from 3.8 to 4.0 per cent surprised on the downside. While we don’t believe this is enough to derail the steady recovery in consumer confidence, the BofE may be comforted that the labour market is beginning to loosen, potentially translating to wage inflation cooling.

This is particularly important for the consumer economy outlook: the negative impact of 13 back-to-back interest rate rises appears to have been relatively minimal so far; this surely can’t last in the face of further rises. Furthermore, British consumers who were lucky enough to build up excess savings over the Covid-19 period may now be slowly eating into them.

Consequences of interest rate rises are finally felt

Research suggests that there’s an 18-month lag on average between an interest rate rise and the effects being felt in the wider economy. This means that we should be feeling the early consequences now, and also that the BofE might well pause after the widely expected August 2023 50 basis point rise to see if its changes are really impacting the economy and having a deflationary effect. The optimistic view for the autumn is that as the inflationary impact of high energy prices fades, so will worker demand for pay rises – something that would definitely be aided by further modest increases in unemployment.

However, if consumers now expect higher inflation to remain the norm they will continue to ask for higher wages (even if they aren’t necessarily required). The traditional way to deal with such a problem would be to put up interest rates until anxious consumers reign in spending. However, this may not be as effective as it used to be: less than one-third of UK homes are mortgaged, and a minority of these are on variable rates.

While the cost of living crisis is expected to continue into 2024, we expect to see increasing consensus early next year that base rates have peaked. This, combined with rebased rents and rates, should give retail property real estate investors and occupiers more confidence to make decisions, and a relative ramping up activity in some markets towards the end of the year. 

Further information

Contact Mat Oakley

Spotlight: Shopping Centre and High Street – Q2 2023