Economic Overview – Year End 2023

By on Thursday, January 11th, 2024 in Lettings, Market Trends, Research, Sales.


Lacklustre performance continues to plague the UK economy. Latest GDP data showed the economy had stagnated in the 3 months to end of October, with 0% growth rate. High borrowing costs are holding back business and consumer activity, while the cost-of-living crisis is squeezing household budgets and limiting consumer expenditure. 

Output in the service sector fell by -0.1% in Q3, driven particularly by a contraction in real estate related services – indicative of the harsh operating environment, with higher interest rates driving significantly lower residential sale volumes. 

As part of the Autumn statement, the Office for Budgetary Responsibility revised its economic forecasts. Over the whole of 2024, the economy is expected to perform very similarly to this year with just 0.4% GDP growth, (compared to +0.5% expected by the end of 2023).

Economic Overview – Year End 2023

So many 2023 headlines have been about inflation but, as we near the end of the year, it seems that inflation is finally trending consistently lower. There was a marked fall in CPI (Consumer Price Index) inflation in Q3 with a rate of 4.6% for the year to end October, and a further fall to 3.9% in November down from 11.1% in October 2022. Current consensus forecasts suggest it will continue to fall, down to 2.5% by Q4 2024. These expected lower levels will get the economy back towards the target rate and represent a vast improvement on 2023.

Economic Overview – Year End 2023

The largest contribution to the fall came from housing and household services due to gas and electricity – gas costs fell by 31% in the year to October 2023. That said, the price of gas is still around 60% higher today than it was in October 2021. Likewise, electricity costs fell by 15.6% in the year to October 2023, compared with a rise of 6.7% in September, but again, they remain 40% higher than in October 2021. It is important to remember that the impact of inflation is cumulative over time, so lower rates today do not cancel out the impact of previous high rates. 

The price of food in October 2023 was also significantly higher than October 2021 by around 30% – and while this is not a direct housing cost, it impacts on household budgets and affordability. 

For London’s labour market, this was a landmark year with service sector employment exceeding 6 million jobs for the first time in the city’s history.  The service sector makes up the vast majority of London’s 6.5 million jobs and It has taken only one decade to add this latest million.

Economic Overview – Year End 2023

However, the beginnings of a weaker job market have been reflected in the KPMG/REC jobs survey for several months now.

The November index saw a sharp fall in permanent staff appointments combined with a fresh decline in temporary placements, suggesting pay pressures will ease too.

Economic Overview – Year End 2023

The Bank of England appears keen to push back on expectations that interest rates will fall quickly in 2024 suggesting there is no scope to cut interest rates anytime soon and so the second half of next year feels the more feasible. Consensus forecasts suggest that the Bank Rate will be 4.7% by the end of 2024.

Whilst the Bank of England is keen to urge caution, the 5-year swap rate reflects a better outlook for interest rates. The swap rate, on which fixed rate mortgages will be priced, rapidly accelerated to above 5% in the aftermath of the Truss Growth Plan and then again in mid 2023 on the back of concerns over persistent core inflation. With the Bank of England holding rates at 5.25% in September, November and December the swap rate has started to edge back below 5%. Coupled with mortgage lenders wishing to driver higher business volumes, we expect 5-year fixed rates will start to improve.

The full impact of higher interest rates has not filtered through to all borrowers yet. The lag for those on fixed rates means there is a wide difference between the new lending rate and fixed rates on outstanding balances for existing borrowers. Longer term forecasts for the Bank rate (annual average 4.1% 2025, 3.3% 2026, 3.1% 2027) remind us that interest rates are not
going back to the lows of the prior 5 years and households will need to adjust to a higher rate environment.  Many existing borrowers might never experience the full impact of the last year’s highs. 

The health of the housing market is critically linked to the health of the economy. So, it should perhaps be no surprise that price growth has moderated in 2023. Given the state of the economy and the dramatic rise in interest rates, residential markets have shown incredible resilience over the last year. Prices in most regions have typically lost just a few percent. Sharper quarterly falls were evident earlier in the year but have since stabilised. 

Whilst pricing has been resilient, many would-be buyers in 2023  opted to sit tight and wait and see what happens with interest rates. 

Mortgage approvals, a lead indicator for future transaction volumes, are currently running at 20% below the levels in the 10 years prior to covid but are widely anticipated to improve in 2024. 

Economic Overview – Year End 2023

In the Prime Minister’s speech delivered on 20 September 2023, he announced key changes to environmental targets previously set by the Government, one of which is of particular impor-tance to landlords. Mr Sunak abandoned plans to introduce mandatory energy efficiency targets for private landlords, which were going to require all newly let properties to have an Energy Performance Certificate (EPC) rating of C by 2025 and all private rented sector homes to reach the grade by 2028. It looked likely that homeowners would be required to do so by 2035, which would ultimately have had knock-on implications for the ease of obtaining mortgages. This, too, has now gone.

Economic Overview – Year End 2023
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