10 October 2018
With a mix of headlines regarding the state of the UK economy, where are we today?
Generally the UK economy is performing steadily, albeit unspectacularly. The headline numbers behind the UK economy are looking okay, but there are weaknesses behind some of those figures.
The latest data for UK economic growth beats expectations, with GDP rising 0.4% in Q2 this year. But looking ahead, the Bank of England expect the economy to grow around 1.75% over the next few years. Modest, but not exactly exciting, particularly compared to the United States whose economy is growing at over 4%.
Inflation has been rising, but with incomes failing to keep pace, saving for many households has been a struggle. However, this changed last month when incomes grew 2.6% over the last three months, beating inflation at 2.4%.
Spare capacity in the UK’s labour market is beginning to run out with unemployment at a 43-year record low, and this is finally putting pressure on wages to start rising. But despite that, productivity is still sluggish. According to the International Monetary Fund (IMF), by Thursday afternoon, the average US or German worker has produced as much as a UK worker manages by Friday afternoon. However, productivity is hard to improve without investment.
The good news is that despite two hikes over the last 12 months, interest rates are set to stay low. In September, the Bank of England voted to hold interest rates at 0.75% and the financial markets are forecasting just one, potentially two, further interest rate hikes by 2020. And this is good news for mortgaged households and should help support demand.
But the latest interest rate rise hasn’t really had much of an immediate impact on the market. Around two-thirds of mortgaged households are on fixed rate mortgages according to UK Finance and haven’t been directly impacted by any interest rate hikes. Additionally, it seems that most lenders had already priced in an interest rate rise, which has meant that mortgage interest rates have barely crept up.
So overall, the economy is looking steady, but Brexit uncertainty still looms large. Leaving the EU without a deal still poses the biggest risk to the future. But the good news is that the fundamentals supporting the economy and housing market are in a better place than they were ten years ago and this builds a firm foundation for growth in the future.
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