So the last year has been quite painful for the UK economy. Interest rates went up, rent prices spiraled out of control, housing sales collapsed, and of course, on top of that, the worst cost of living crisis in a generation. But on the more positive side, okay, UK consumers and households have shown they're pretty resilient and as we reach the end of the year, there are also signs that inflation is cooling. So is there room to be more
optimistic in the outlook for next year? Welcome to In the City, Bloomberg's podcast, connecting you to the conversations and the stories shaping the world of finance. I'm front sin Laqwa in our London studio and today I'm joined by John Steppek, bloomberg Senior reporter and writer of the Money Distilled newsletter, also a little bit of a house pricing guru, and Phil Aldrich, Bloomberg's UK senior economics reporter guy. So we know that every year people just tune into the
podcast to know how much their house is worth. So, John, where a house price is going in twenty twenty four? Right?
Well, I actually think that I think that continue knew to ease lower in real terms, but I expected them befall a lot further best year. I thought they would probably be down about ten percent in nominal terms, which is pretty much in line with most of the economists eventually came me think, but that's not happened, and it's been really interesting now. It's been really resilient because I didn't actually think the economy was going to be a problem.
I thought the economy was basically going to be a bit rubbish but not terrible, which is basically what's happened. But then expect house prices to stick where they are as much as they have.
But I remember, I mean last year was just a we thought it would be worse than it is overall, right, Phil.
Yeah, so John, you're in good company because hadifax a nation where both were forecasting sort of eight percent ish fools. I think so, And there was some even even more dramatic house price crushes out there. But I think they're going to creep up a whole percentage point.
The prediction of that is it one percentage point move by Phil Aldrich?
Yeah, because obviously the I think the mortgage conditions are easing. I mean, it's still expensive compared to what people had a couple of years ago. And again, if we get massive unemployment, which I don't think is going to happen, but if we did get a shop runs in unemployment, then you would start to see the kind of the kind of scenarios that John was predicting for last year.
Yeah, that is, isn't it? The jobs factor? And then also I do think the mortgage rates is interesting. I think one thing whenever I look at the economists predictions is that one thing that they tended and I think it's because of a micro level. They tended to forget the average mortgage rates are not the rates that people
actually get because nobody gets the average mortgage rate. They always get the best buy rate, and so they were actually probably about a percentage point lower than most people. Then you know, the models were based on but even then, you know, you're I'm still talking about you know, it was like going up from one and a half to four and a half percent, and still all that's happened is that maybe the number of transactions kind of dropped off quite significantly.
But you had an interesting theory, and actually we haven't been to feel about how many interest rate cuts you're expecting for the Bank of England, and John was thinking, actually could be a way to cush in the mortgage market. So if they can't, I mean, this would be I don't know how they pull it off, right, They would start cutting right at the time when people start remortgaging the most, and so you kind of you could get away with a softening economy but helping out people with new houses.
Oh, you've all I mean, you've already got that. This is the thing because the I mean market expectations peaked a good few months ago, and now that you know, gelt yields and kind of forward swap rates and all the rest that are dropping down, mortgages are getting increasingly cheaper.
So in a weird kind of way, if you haven't already had to remortgage, whatever you're facing next year is actually not going to be as bad as you'd may be expected or applanned for, assuming mortgageries keep going down. And so if the transmission mechanism has been because that's the thing, the priests of credit is the transmission mechanism by which the Bank of England is made slow down
the economy. And we kept talking about who everyone's spending was going to be squeezed by rising mortgageries, So maybe that's not actually it's going to happen, at least not to that extent.
But how many interest rate cuts are you expecting next year?
I think maybe maybe maybe two two in the second half of the year.
The market's like out of control.
Yeah, well they've got they've got four in for the second half of next year or between May and December, and and then like there could be a fifth, so you'll you get you get the fifth one sort of early twenty twenty five. I think that that's too strong, because actually I think the economy is going to look reasonably resilient next year. You know, we're going to have an election and the government is going to do whatever it can right to make sure that the economy is
not in it knees. And actually there's a whole lot of spending or sort of living standard boost coming through from April next year, and then maybe even more if they managed to squeeze in a couple of tacks or a bit of a tax cut in the March budget. So I think there's going to be this kind of this household spending power is going to start to start to really buoy the economy, so why would you be cutting rates aggressively in that situation? That's my thinking.
But phil Over, how would you describe the UK economy Because it's staged, so it's not great, it's not awful, it's kind of like in this limbo. It's a bit stagnant, which I guess makes it harder for the Bank of England to set interest rates.
Forecasts are all basically like zero to zero point two percent growth a quarter. I mean it is we're basically flatlining with high higher than required inflation, which is sort of stagnation as where we are. The thing is, what we are going to see is everything's relative right. Households are going to start to feel better than they did in twenty twenty three, and that's just pure because wages
have risen. So they'll get these wage rises in January and February, which are probably going to be higher than what the inflation rate is across twenty twenty four, and then you're going to get all this The benefits and pensions are resetting at inflation rates that were set in September twenty twenty three, so that's like and actually for pensions it was wages, so you've got eight point five percent increase in pensioner benefits and you've got a six
point seven percent increase in working age welfare recipients, and those will be above inflation at the time that they come through, so that's going to feel like a bump. Energy prices are falling. Obviously, we don't know what's going to happen. The sewers Canal may cause another supply change, Shark and Israel Gaza could somehow destabilize the Middle East and we could get But the current outlook is you've got energy prices falling, you know, in April again, we've
got the knicks cut from January. You know, are we going to get income tax cuts in the March budget. It's plausible. It's there's going to be a chunk of sort of spending power that will start to feed through in the second half of the year. So it'll be a kind of year or two hearts in my moment, So we're going to we even have a very shallow technical recession and then start to see some resilience. But I don't think there's any there will be any urgency
for the Bank of England to do straight cuts. You only see that happening to the economy was already tanking.
So okay, if we take a step back, there's a lot of talk about the FED cutting and I think that the only question that we probably need to ask ourselves is that because it tracks inflation or is that because they're cutting interest rates into a recession? And that will also, I guess impact what the Bank of England does.
Yeah, I mean I think that's driven by inflation. I think the Fed's got a mental target for where real entest rate it should be. And if you look back over before two thousand and eight, even if you look at the Bank of England, so the Bank England based ray was was was the highest lane and then wage inflation and then CPI was a bit two percent the
points roughly below that consistently. So actually, if if inflation is coming down and the Bank englandry is at five point two five percent and inflation gets closer the you know three, then maybe they think about it. But I do, yeah, I mean, I agree, we feel I think that five cuts next year is just kind of nuts, just like, why would you you know, do that unless unless the
economy is actually run into trouble. And again there's not much reason to say that, because the other thing isn't April does a whopping big minimum wage rise as well.
Yeah, yeah, exactly.
Now I know a lot of companies are not quite feel able to admit that, you know, they're not actually so happy about that, but you know, even then, I think they're going to be prepared for it. So yeah, so the people spend power is going to go up, and there is that, So really I think it does boil down. What does happen with inflation next year for the UK? And it's just hard to see it getting to a point where they cut it that far.
But inflation, so inflation is coming down, but it's still quite persistent.
Exactly.
Yeah, so the under underlying services inflation. Megan Green at the Bank of England, she looks in this particular measure which is sort of you take the energy element out of services and then you're looking at really what is just embedded in in domestic prices and that is basically
static at about six percent, just over six percent. And Bloomberg Economics have sort of they've created this data set as well because it doesn't the ONNUS doesn't produce it, so you can say that basically there is some there are definitely underlying price pressures in the UK. So does
inflation come down rapidly? I think everyone expects the headline rate to be coming down, but these But then just because of the rebasing, you know, as energy prices dropping it automatically, as some goods price inflation from last year from twenty twenty three starts to drop out, you get that rebasing, so you're going to get that fall. But then people will begin to point to the fact that underlined there seems to be pressure, so that you'll see
that you'll see inflation lift off again. And if you've got because yeah, the minimum wage risers is is it another huge one? Simon Francis called calculated that if you put the pensioners and the and the welfare recipients and the minimum wage rise together, you've got twenty million people getting above inflation at that point increases in their income, which is a big is a big sort of potential inflation research.
But this is why I don't understand. So mid December also Governor Bailey warned that actually borrowing costs may have to rise again, which the market is completely discounting. I mean, why are we so sure that there won't be interest rate rises next year.
I mean, I'd be surprised if there's entry straight rises, particularly if the Fed is going the other way. I mean, a lower does bible down it. Certainly from a market point of view, I feel that it's just the Feed is the big daddy, and then everybody else is just expected to fall in the lane. There is also a perception, partly fuel Bailey to be feel that the UK is still in dire straits compared to where it actually is,
which is mediocre at lost. So you know, I think there's a bit of mixed messaging coming out there, and also probably a bit of defensiveness because obviously the Bank England was criticized quite heavily fun pain to not fast enough to tackle inflation, and now there's a lot of pushback from not again not just the Bank England, but lots of central bankers, including the FED, against this idea of the rates are going to huddle downwards, and I think,
I mean, I think that's somewhere in the middle. I mean, my own view is that interest rates have peaked and they're not going to go above five and a quarter
percent next year. Equally, I don't think they're going to be down as far as kind of four percent by the end of the year, because that seems very aggressive, and yeah, it's just and also I guess there's a bit of irrational exuberance as well, because markets are kind of really they've clearly been desperate for interest rates to peak basically since they started going up, and now that they've got this kind of sense that, oh, actually that
is it, everyone's desperate to go back to. You know, they kind of off to the races kind of world where like bitcoins shooting up and things like that, very speculative environment, and I think I always think, I say think part is just pure wishful thinking the economy.
And I understand that, you know, Governor Bailey keeps on saying that we're in a bit of dire straits and as you say, it's mediocre at best, But how can you go from three and a half percent interest rates to five point twenty five without something more of a shock It is twenty twenty four. I mean, we're actually going to get away with having this economy be okay and then going back to normal cycles after all we've lived through in the last three years, I.
Mean three and a half being the what people think that the sort of neutral rate of interest will be,
the sort of where in straits will eventually settle. Yeah, I could get them to get finish the strates to get down there really quickly, would I mean, that would be such a stimulative effect that I just can't see any central bankers, having just lived through a massive inflation shock, just being like right this unless unless yeah, you're just not going to You're just not going to see that at the moment in the you know, interest rates are below or have been below the rate of inflation, and
then they'll soon be above the rate of inflation, and there and so there will be there is effectively a sort of tightening impact simply because inflation is falling, So you in a way doing nothing is still a sort of active policy, especially when you think that the equilibrient rate is about three and a half percent, so you know you can see cuts coming just because you know it doesn't need to be as as aggressively tightening once
you've got the headline rate of inflation lot. But you can also see that they will be wanting to absolutely be sure that they have squeezed the inflation out of the system. Because that has been an absolute nightmare for them, you know, reputationally, it's been damaging economically. So it's something which you don't want to have to cut back to because as it would be a clear demonstration of failure as well if they did have to come back to importation with high rights.
I think in terms of things breaking, like you know, the idea we've got away with interest rates going up so far, so fast, and I mean absolutely, I mean I think anyone that you'd asked eighteen months ago interest rates are going to go from zero point five percent to five point five and a quarter percent in eighteen months, they would think, you know, the world was going to end,
and it hasn't. And but I think that if you dig deeper, then a lot of that is because whether we kind of fully appreciate it or not, everyone's balance sheet is more resilient than it was in two thousand and eight. And I know, always go back to two thousand and eight except the governments, except the governments exactly. But the difference is the government is the one entity that has got if you like, the kind of the
longest kind of runway. Now you know, we might have was suffering debt crisis, and that is the one thing I guess that if I was going to worry about anything, then something happening with sovereign debts somewhere in the world would be looks kind of weak point.
What does that look like?
Well, this is the promise, like, well, what does it look like? It's like, what happens if? I mean, I don't like, I don't see a run on the pound or even I mean, I mean, I guess the most the weirdest thing is the most vulnerable place would be the Eurozone. But only because of the nature of the euro It's you know, if if, because it's this kind
of slightly frankensteinish still political construct. It means that if France, say blows the budget in Germany he's like, well, sorry, we're not going to, you know, help you out with that, then potentially you could have the euro fracture. But again that's kind of you know, that's what happened in the
Greek Southern debt crisis. And at that point, I feel, much as I'm quite a euroskeptic, I do think that they got the institutional structures in place in the permits for the Central Bank to basically do what it wants to patch up and protect the Euro. So beyond that it is hard to see. I mean maybe, I mean Japan is an interesting one. If the Japanese suddenly I mean think they've been very I mean everyone thought they
were going to tighten monetary policy, they shouldn't. They haven't, which is why the end is kind.
Of yeah exactly.
So it's that's probably interesting in terms of if Japan does tighten monetary policy at some point, there's the risk of you know, a kind of flood of cash moving from one end of the world to another, and that might be something that causes some things to break.
But what would it mean for the UK economy that much?
I mean, I think for the UK economy, I don't think there's anything that's going to blow up. And I think that's basically because credit has been more restrictive since two thousand and eight, and so households aren't actually overborrowed relative to where they were back then. Companies actually aren't of the border reactors to be able to work back then, and that's why everyone's corked. I mean, there's not been happy bank balance sheets again. The banks that are resilient, well,
I think that the private credit market. I think the stuff in the shadow, in the shadow banking sector is frightening because the private equity, uh, you know, what are the valuations, what are the real valuations that no one knows you know, a lot of them. And there's private credit, which is a lot of the private credit providers are owned by private equity companies, private equity firms who own some of the companies in their portfolio that are being
lent to by the private credit companies. I mean it is a there's a sort of incestuous issue of opacity, which you know, if you would look somewhere where you go, nobody quite understands it what's going to blow up, And it's quite a substantial part of the economy. And it's one that it feels to me like a potential subprime because nobody understands where the risks lie, how big the risks are, and when the valuations start falling, how how
these are declared. And you could get like these big selfs, So you could get some kind of real I'd say, at the extreme, some financial instability.
That twenty twenty four, I think forty countries vote. I think more than forty countries vote. The UK has to vote before end of January twenty twenty five, and then you have the US elections. These two would I mean it certainly the UK if Labor gets into power changes everything about the economy, does it not?
I actually don't think so. Not in the UK. I don't think the difference between the two parties is that great anymore, or certainly not the way they're talking. So Labor have kind of like obviously been very keen to impress upoint business that we are not Jeremy Corbin, you know, part two, but.
We have very little detail.
Oh yeah, yeah, yeah, absolutely, But I mean there's certainly the pitch is that there's not a lot of give in the system, so you know, they're going to have to be sensible with the finances all that sort of stuff. So don't actually think it does change things that much from a market view.
They talk about wanting to be in power for ten years, right, and if they come in and they do something which is completely contrary to what they're talking about now, they
will be out and the next vote. I think that they're definitely trying to be you know, remodel Blair and provide a stable economic backdrop, you know, and actually, in a way, I was thinking, our election is going to be between at the moments of a managerial prime minister who people think is very solid on the economy and a managerial Labor party which basically is saying we're going to do what he says. And so you have actually
in a way got the UK for international businesses. That would be quite stable because you don't have a al Penn or AfD or you know, on the other side that's a real threat. I mean, reforms just are sort of steal votes from the Tories, but it's not a
real threat. So that feels quite stable. And then in a way also if you think that if Richie, if the Tories do come back in but with a very slim majority, which is I mean that's the best hope that they would have, the risk is that he would then be beholden to this kind of extremist right wing of the party, which could end up with the Tories being more damaging for the economy than a stable, a more stable Labor stroke Lib Dem coalition if that's what
it ended up as well, you know, supply and confidence and supply deal if that's I mean, if there's a hung parliament yeah, that I would imagine that we would end up having another election within within a year or two. But the idea that the Tory option is by far the safest is I don't think it necessarily stands up because that kind of you know, that that wing of the Tory Party that just doesn't seem to restrain itself at all anymore, is potentially a little dangerous.
Thank you both so much. Thanks thanks for listening to this week's in the City. We'll be back in the new year, but in the meantime, check out some of our past shows, and do not please do not forget to leave a review wherever you listen to podcasts. This episode was hosted by me Francine Laquin. It was produced by Somersaudi and Tiffany Choy. Additional editing by Blake Maples and special thanks to John Stepec and Phil Aldrich.