The week ahead 17 February 2025 - UK economy grows unexpectedly
What to watch out for in the UK economy and property market this week.
UK GDP saw slow growth in the last three months of 2024 despite fears the economy had ground to a halt. In Q4 2024, GDP increased by 0.1% q-on-q after having flatlined in Q3. City analysts had been predicting no change in Q4 according to a Reuters survey. Growth for services (0.2%) and construction (0.5%) counterbalanced a -0.8% contraction for the production sector. Within production, there was a -2.5% decline for the mining and quarrying sub-sector, which is overwhelmingly made up of the North Sea oil and gas industry. Production from the North Sea is in long-term decline after peaking in 1999.
If we look at the underlying data two things stand out. Firstly, there appears to have been a surge in activity in the final month of the quarter. The month-on-month GDP growth figures were as follows: October -0.2%, November 0.1% and December 0.4%. It has been widely said the Chancellor’s Budget in late October dampened the economy, but the initial figures show growth picking up (albeit tentatively) in the subsequent months – although we need to see more data before that can become a firm conclusion. Second, the GDP data for a range of industries has now become volatile, switching from growth to contraction almost on a monthly basis. This is significant for the property market, as commercial tenants only tend to consider off-loading business space when they have seen several unbroken months of falling activity.
It is worth at this point discussing sentiment in the property sector, as this year it has experienced a roller coaster ride. Early to mid-January saw growing concerns over the impact of rising gilt yields on property. Then gilt yields began to fall, causing market morale to stabilise. It was bolstered further by the recent base rate cut, and the news on GDP will also help. Sentiment perhaps though needs a protracted period of calm before we see stronger sales volumes for property, perhaps in the spring.
This week sees UK inflation data released, which could impact the timing of the next Bank of England Base Rate cut. We are forecasting a small decline for inflation in January. However, if there were a sharper than expected deterioration then pressure would build on the Bank to loosen policy again, and sooner rather than later. Afterall, two Monetary Policy Committee (MPC) rate setters voted for a 50 bps Base Rate cut earlier this month, compared to the 25 bps the majority favoured. The next MPC meeting will be on 20th March.
Many major global economies, including the UK, will see preliminary PMI figures released on Friday. The convention of the PMI index is that a reading of over 50 points to growth in the commercial side of the economy. The UK has sunken close to the 50 mark in recent months but just managed to stay above it. The economic news has been less downbeat in recent weeks, so we think sentiment may have improved in February, potentially moving the UK PMI slightly higher.
This week's figures
WEDNESDAY 19 FEBRUARY
UK CPI Inflation Rate, January
2.5% previous
2.4% forecast
The economy has been in a slowdown for several months now and we would expect that to translate into downwards pressure on prices. We are predicting both headline and core inflation to edge down in the January figures.
FRIDAY 21 FEBRUARY
UK Retail Sales, y-on-y, January
3.6% previous
3.9% forecast
The latest data highlighted higher retail footfall on a 12-month comparison in January, although consumer sentiment remains weak. Consequently, we are forecasting a small improvement in retail sales growth.
FRIDAY 21 FEBRUARY
UK ‘Flash’ Composite PMI, January
50.6 previous
50.8 forecast
The composite figure moved marginally away from the pivotal 50 mark in January, and the Bank of England Base Rate cut in early February may have boosted confidence. We believe there will be a modest rise in the UK PMI.
