Speaker 1: So the last year has been quite painful for the
Speaker 1: UK economy. Interest rates went up, rent prices spiraled out
Speaker 1: of control, housing sales collapsed, and of course, on top
Speaker 1: of that, the worst cost of living crisis in a generation.
Speaker 1: But on the more positive side, okay, UK consumers and
Speaker 1: households have shown they're pretty resilient and as we reach
Speaker 1: the end of the year, there are also signs that
Speaker 1: inflation is cooling. So is there room to be more
Speaker 1: optimistic in the outlook for next year? Welcome to In
Speaker 1: the City, Bloomberg's podcast, connecting you to the conversations and
Speaker 1: the stories shaping the world of finance. I'm front sin
Speaker 1: Laqwa in our London studio and today I'm joined by
Speaker 1: John Steppek, bloomberg Senior reporter and writer of the Money
Speaker 1: Distilled newsletter, also a little bit of a house pricing guru,
Speaker 1: and Phil Aldrich, Bloomberg's UK senior economics reporter guy. So
Speaker 1: we know that every year people just tune into the
Speaker 1: podcast to know how much their house is worth. So, John,
Speaker 1: where a house price is going in twenty twenty four? Right?
Speaker 2: Well, I actually think that I think that continue knew
Speaker 2: to ease lower in real terms, but I expected them
Speaker 2: befall a lot further best year. I thought they would
Speaker 2: probably be down about ten percent in nominal terms, which
Speaker 2: is pretty much in line with most of the economists
Speaker 2: eventually came me think, but that's not happened, and it's
Speaker 2: been really interesting now. It's been really resilient because I
Speaker 2: didn't actually think the economy was going to be a problem.
Speaker 2: I thought the economy was basically going to be a
Speaker 2: bit rubbish but not terrible, which is basically what's happened.
Speaker 2: But then expect house prices to stick where they are
Speaker 2: as much as they have.
Speaker 1: But I remember, I mean last year was just a
Speaker 1: we thought it would be worse than it is overall, right, Phil.
Speaker 3: Yeah, so John, you're in good company because hadifax a
Speaker 3: nation where both were forecasting sort of eight percent ish fools.
Speaker 3: I think so, And there was some even even more
Speaker 3: dramatic house price crushes out there. But I think they're
Speaker 3: going to creep up a whole percentage point.
Speaker 1: The prediction of that is it one percentage point move
Speaker 1: by Phil Aldrich?
Speaker 3: Yeah, because obviously the I think the mortgage conditions are easing.
Speaker 3: I mean, it's still expensive compared to what people had
Speaker 3: a couple of years ago. And again, if we get
Speaker 3: massive unemployment, which I don't think is going to happen,
Speaker 3: but if we did get a shop runs in unemployment,
Speaker 3: then you would start to see the kind of the
Speaker 3: kind of scenarios that John was predicting for last year.
Speaker 2: Yeah, that is, isn't it? The jobs factor? And then
Speaker 2: also I do think the mortgage rates is interesting. I
Speaker 2: think one thing whenever I look at the economists predictions
Speaker 2: is that one thing that they tended and I think
Speaker 2: it's because of a micro level. They tended to forget
Speaker 2: the average mortgage rates are not the rates that people
Speaker 2: actually get because nobody gets the average mortgage rate. They
Speaker 2: always get the best buy rate, and so they were
Speaker 2: actually probably about a percentage point lower than most people.
Speaker 2: Then you know, the models were based on but even then,
Speaker 2: you know, you're I'm still talking about you know, it
Speaker 2: was like going up from one and a half to
Speaker 2: four and a half percent, and still all that's happened
Speaker 2: is that maybe the number of transactions kind of dropped
Speaker 2: off quite significantly.
Speaker 1: But you had an interesting theory, and actually we haven't
Speaker 1: been to feel about how many interest rate cuts you're
Speaker 1: expecting for the Bank of England, and John was thinking,
Speaker 1: actually could be a way to cush in the mortgage market.
Speaker 1: So if they can't, I mean, this would be I
Speaker 1: don't know how they pull it off, right, They would
Speaker 1: start cutting right at the time when people start remortgaging
Speaker 1: the most, and so you kind of you could get
Speaker 1: away with a softening economy but helping out people with
Speaker 1: new houses.
Speaker 2: Oh, you've all I mean, you've already got that. This
Speaker 2: is the thing because the I mean market expectations peaked
Speaker 2: a good few months ago, and now that you know,
Speaker 2: gelt yields and kind of forward swap rates and all
Speaker 2: the rest that are dropping down, mortgages are getting increasingly cheaper.
Speaker 2: So in a weird kind of way, if you haven't
Speaker 2: already had to remortgage, whatever you're facing next year is
Speaker 2: actually not going to be as bad as you'd may
Speaker 2: be expected or applanned for, assuming mortgageries keep going down.
Speaker 2: And so if the transmission mechanism has been because that's
Speaker 2: the thing, the priests of credit is the transmission mechanism
Speaker 2: by which the Bank of England is made slow down
Speaker 2: the economy. And we kept talking about who everyone's spending
Speaker 2: was going to be squeezed by rising mortgageries, So maybe
Speaker 2: that's not actually it's going to happen, at least not
Speaker 2: to that extent.
Speaker 1: But how many interest rate cuts are you expecting next year?
Speaker 3: I think maybe maybe maybe two two in the second
Speaker 3: half of the year.
Speaker 1: The market's like out of control.
Speaker 3: Yeah, well they've got they've got four in for the
Speaker 3: second half of next year or between May and December,
Speaker 3: and and then like there could be a fifth, so
Speaker 3: you'll you get you get the fifth one sort of
Speaker 3: early twenty twenty five. I think that that's too strong,
Speaker 3: because actually I think the economy is going to look
Speaker 3: reasonably resilient next year. You know, we're going to have
Speaker 3: an election and the government is going to do whatever
Speaker 3: it can right to make sure that the economy is
Speaker 3: not in it knees. And actually there's a whole lot
Speaker 3: of spending or sort of living standard boost coming through
Speaker 3: from April next year, and then maybe even more if
Speaker 3: they managed to squeeze in a couple of tacks or
Speaker 3: a bit of a tax cut in the March budget.
Speaker 3: So I think there's going to be this kind of
Speaker 3: this household spending power is going to start to start
Speaker 3: to really buoy the economy, so why would you be
Speaker 3: cutting rates aggressively in that situation? That's my thinking.
Speaker 1: But phil Over, how would you describe the UK economy
Speaker 1: Because it's staged, so it's not great, it's not awful,
Speaker 1: it's kind of like in this limbo. It's a bit stagnant,
Speaker 1: which I guess makes it harder for the Bank of
Speaker 1: England to set interest rates.
Speaker 3: Forecasts are all basically like zero to zero point two
Speaker 3: percent growth a quarter. I mean it is we're basically
Speaker 3: flatlining with high higher than required inflation, which is sort
Speaker 3: of stagnation as where we are. The thing is, what
Speaker 3: we are going to see is everything's relative right. Households
Speaker 3: are going to start to feel better than they did
Speaker 3: in twenty twenty three, and that's just pure because wages
Speaker 3: have risen. So they'll get these wage rises in January
Speaker 3: and February, which are probably going to be higher than
Speaker 3: what the inflation rate is across twenty twenty four, and
Speaker 3: then you're going to get all this The benefits and
Speaker 3: pensions are resetting at inflation rates that were set in
Speaker 3: September twenty twenty three, so that's like and actually for
Speaker 3: pensions it was wages, so you've got eight point five
Speaker 3: percent increase in pensioner benefits and you've got a six
Speaker 3: point seven percent increase in working age welfare recipients, and
Speaker 3: those will be above inflation at the time that they
Speaker 3: come through, so that's going to feel like a bump.
Speaker 3: Energy prices are falling. Obviously, we don't know what's going
Speaker 3: to happen. The sewers Canal may cause another supply change,
Speaker 3: Shark and Israel Gaza could somehow destabilize the Middle East
Speaker 3: and we could get But the current outlook is you've
Speaker 3: got energy prices falling, you know, in April again, we've
Speaker 3: got the knicks cut from January. You know, are we
Speaker 3: going to get income tax cuts in the March budget.
Speaker 3: It's plausible. It's there's going to be a chunk of
Speaker 3: sort of spending power that will start to feed through
Speaker 3: in the second half of the year. So it'll be
Speaker 3: a kind of year or two hearts in my moment,
Speaker 3: So we're going to we even have a very shallow
Speaker 3: technical recession and then start to see some resilience. But
Speaker 3: I don't think there's any there will be any urgency
Speaker 3: for the Bank of England to do straight cuts. You
Speaker 3: only see that happening to the economy was already tanking.
Speaker 1: So okay, if we take a step back, there's a
Speaker 1: lot of talk about the FED cutting and I think
Speaker 1: that the only question that we probably need to ask
Speaker 1: ourselves is that because it tracks inflation or is that
Speaker 1: because they're cutting interest rates into a recession? And that
Speaker 1: will also, I guess impact what the Bank of England does.
Speaker 2: Yeah, I mean I think that's driven by inflation. I
Speaker 2: think the Fed's got a mental target for where real
Speaker 2: entest rate it should be. And if you look back
Speaker 2: over before two thousand and eight, even if you look
Speaker 2: at the Bank of England, so the Bank England based
Speaker 2: ray was was was the highest lane and then wage
Speaker 2: inflation and then CPI was a bit two percent the
Speaker 2: points roughly below that consistently. So actually, if if inflation
Speaker 2: is coming down and the Bank englandry is at five
Speaker 2: point two five percent and inflation gets closer the you
Speaker 2: know three, then maybe they think about it. But I do, yeah,
Speaker 2: I mean, I agree, we feel I think that five
Speaker 2: cuts next year is just kind of nuts, just like,
Speaker 2: why would you you know, do that unless unless the
Speaker 2: economy is actually run into trouble. And again there's not
Speaker 2: much reason to say that, because the other thing isn't
Speaker 2: April does a whopping big minimum wage rise as well.
Speaker 3: Yeah, yeah, exactly.
Speaker 2: Now I know a lot of companies are not quite
Speaker 2: feel able to admit that, you know, they're not actually
Speaker 2: so happy about that, but you know, even then, I
Speaker 2: think they're going to be prepared for it. So yeah,
Speaker 2: so the people spend power is going to go up,
Speaker 2: and there is that, So really I think it does
Speaker 2: boil down. What does happen with inflation next year for
Speaker 2: the UK? And it's just hard to see it getting
Speaker 2: to a point where they cut it that far.
Speaker 1: But inflation, so inflation is coming down, but it's still
Speaker 1: quite persistent.
Speaker 2: Exactly.
Speaker 3: Yeah, so the under underlying services inflation. Megan Green at
Speaker 3: the Bank of England, she looks in this particular measure
Speaker 3: which is sort of you take the energy element out
Speaker 3: of services and then you're looking at really what is
Speaker 3: just embedded in in domestic prices and that is basically
Speaker 3: static at about six percent, just over six percent. And
Speaker 3: Bloomberg Economics have sort of they've created this data set
Speaker 3: as well because it doesn't the ONNUS doesn't produce it,
Speaker 3: so you can say that basically there is some there
Speaker 3: are definitely underlying price pressures in the UK. So does
Speaker 3: inflation come down rapidly? I think everyone expects the headline
Speaker 3: rate to be coming down, but these But then just
Speaker 3: because of the rebasing, you know, as energy prices dropping
Speaker 3: it automatically, as some goods price inflation from last year
Speaker 3: from twenty twenty three starts to drop out, you get
Speaker 3: that rebasing, so you're going to get that fall. But
Speaker 3: then people will begin to point to the fact that
Speaker 3: underlined there seems to be pressure, so that you'll see
Speaker 3: that you'll see inflation lift off again. And if you've
Speaker 3: got because yeah, the minimum wage risers is is it
Speaker 3: another huge one? Simon Francis called calculated that if you
Speaker 3: put the pensioners and the and the welfare recipients and
Speaker 3: the minimum wage rise together, you've got twenty million people
Speaker 3: getting above inflation at that point increases in their income,
Speaker 3: which is a big is a big sort of potential
Speaker 3: inflation research.
Speaker 1: But this is why I don't understand. So mid December
Speaker 1: also Governor Bailey warned that actually borrowing costs may have
Speaker 1: to rise again, which the market is completely discounting. I mean,
Speaker 1: why are we so sure that there won't be interest
Speaker 1: rate rises next year.
Speaker 2: I mean, I'd be surprised if there's entry straight rises,
Speaker 2: particularly if the Fed is going the other way. I mean,
Speaker 2: a lower does bible down it. Certainly from a market
Speaker 2: point of view, I feel that it's just the Feed
Speaker 2: is the big daddy, and then everybody else is just
Speaker 2: expected to fall in the lane. There is also a perception,
Speaker 2: partly fuel Bailey to be feel that the UK is
Speaker 2: still in dire straits compared to where it actually is,
Speaker 2: which is mediocre at lost. So you know, I think
Speaker 2: there's a bit of mixed messaging coming out there, and
Speaker 2: also probably a bit of defensiveness because obviously the Bank
Speaker 2: England was criticized quite heavily fun pain to not fast
Speaker 2: enough to tackle inflation, and now there's a lot of
Speaker 2: pushback from not again not just the Bank England, but
Speaker 2: lots of central bankers, including the FED, against this idea
Speaker 2: of the rates are going to huddle downwards, and I think,
Speaker 2: I mean, I think that's somewhere in the middle. I mean,
Speaker 2: my own view is that interest rates have peaked and
Speaker 2: they're not going to go above five and a quarter
Speaker 2: percent next year. Equally, I don't think they're going to
Speaker 2: be down as far as kind of four percent by
Speaker 2: the end of the year, because that seems very aggressive,
Speaker 2: and yeah, it's just and also I guess there's a
Speaker 2: bit of irrational exuberance as well, because markets are kind
Speaker 2: of really they've clearly been desperate for interest rates to
Speaker 2: peak basically since they started going up, and now that
Speaker 2: they've got this kind of sense that, oh, actually that
Speaker 2: is it, everyone's desperate to go back to. You know,
Speaker 2: they kind of off to the races kind of world
Speaker 2: where like bitcoins shooting up and things like that, very
Speaker 2: speculative environment, and I think I always think, I say
Speaker 2: think part is just pure wishful thinking the economy.
Speaker 1: And I understand that, you know, Governor Bailey keeps on
Speaker 1: saying that we're in a bit of dire straits and
Speaker 1: as you say, it's mediocre at best, But how can
Speaker 1: you go from three and a half percent interest rates
Speaker 1: to five point twenty five without something more of a
Speaker 1: shock It is twenty twenty four. I mean, we're actually
Speaker 1: going to get away with having this economy be okay
Speaker 1: and then going back to normal cycles after all we've
Speaker 1: lived through in the last three years, I.
Speaker 3: Mean three and a half being the what people think
Speaker 3: that the sort of neutral rate of interest will be,
Speaker 3: the sort of where in straits will eventually settle. Yeah,
Speaker 3: I could get them to get finish the strates to
Speaker 3: get down there really quickly, would I mean, that would
Speaker 3: be such a stimulative effect that I just can't see
Speaker 3: any central bankers, having just lived through a massive inflation shock,
Speaker 3: just being like right this unless unless yeah, you're just
Speaker 3: not going to You're just not going to see that
Speaker 3: at the moment in the you know, interest rates are
Speaker 3: below or have been below the rate of inflation, and
Speaker 3: then they'll soon be above the rate of inflation, and
Speaker 3: there and so there will be there is effectively a
Speaker 3: sort of tightening impact simply because inflation is falling, So
Speaker 3: you in a way doing nothing is still a sort
Speaker 3: of active policy, especially when you think that the equilibrient
Speaker 3: rate is about three and a half percent, so you
Speaker 3: know you can see cuts coming just because you know
Speaker 3: it doesn't need to be as as aggressively tightening once
Speaker 3: you've got the headline rate of inflation lot. But you
Speaker 3: can also see that they will be wanting to absolutely
Speaker 3: be sure that they have squeezed the inflation out of
Speaker 3: the system. Because that has been an absolute nightmare for them,
Speaker 3: you know, reputationally, it's been damaging economically. So it's something
Speaker 3: which you don't want to have to cut back to
Speaker 3: because as it would be a clear demonstration of failure
Speaker 3: as well if they did have to come back to
Speaker 3: importation with high rights.
Speaker 2: I think in terms of things breaking, like you know,
Speaker 2: the idea we've got away with interest rates going up
Speaker 2: so far, so fast, and I mean absolutely, I mean
Speaker 2: I think anyone that you'd asked eighteen months ago interest
Speaker 2: rates are going to go from zero point five percent
Speaker 2: to five point five and a quarter percent in eighteen months,
Speaker 2: they would think, you know, the world was going to end,
Speaker 2: and it hasn't. And but I think that if you
Speaker 2: dig deeper, then a lot of that is because whether
Speaker 2: we kind of fully appreciate it or not, everyone's balance
Speaker 2: sheet is more resilient than it was in two thousand
Speaker 2: and eight. And I know, always go back to two
Speaker 2: thousand and eight except the governments, except the governments exactly.
Speaker 2: But the difference is the government is the one entity
Speaker 2: that has got if you like, the kind of the
Speaker 2: longest kind of runway. Now you know, we might have
Speaker 2: was suffering debt crisis, and that is the one thing
Speaker 2: I guess that if I was going to worry about anything,
Speaker 2: then something happening with sovereign debts somewhere in the world
Speaker 2: would be looks kind of weak point.
Speaker 1: What does that look like?
Speaker 2: Well, this is the promise, like, well, what does it
Speaker 2: look like? It's like, what happens if? I mean, I
Speaker 2: don't like, I don't see a run on the pound
Speaker 2: or even I mean, I mean, I guess the most
Speaker 2: the weirdest thing is the most vulnerable place would be
Speaker 2: the Eurozone. But only because of the nature of the
Speaker 2: euro It's you know, if if, because it's this kind
Speaker 2: of slightly frankensteinish still political construct. It means that if France,
Speaker 2: say blows the budget in Germany he's like, well, sorry,
Speaker 2: we're not going to, you know, help you out with that,
Speaker 2: then potentially you could have the euro fracture. But again
Speaker 2: that's kind of you know, that's what happened in the
Speaker 2: Greek Southern debt crisis. And at that point, I feel,
Speaker 2: much as I'm quite a euroskeptic, I do think that
Speaker 2: they got the institutional structures in place in the permits
Speaker 2: for the Central Bank to basically do what it wants
Speaker 2: to patch up and protect the Euro. So beyond that
Speaker 2: it is hard to see. I mean maybe, I mean
Speaker 2: Japan is an interesting one. If the Japanese suddenly I
Speaker 2: mean think they've been very I mean everyone thought they
Speaker 2: were going to tighten monetary policy, they shouldn't. They haven't,
Speaker 2: which is why the end is kind.
Speaker 1: Of yeah exactly.
Speaker 2: So it's that's probably interesting in terms of if Japan
Speaker 2: does tighten monetary policy at some point, there's the risk
Speaker 2: of you know, a kind of flood of cash moving
Speaker 2: from one end of the world to another, and that
Speaker 2: might be something that causes some things to break.
Speaker 1: But what would it mean for the UK economy that much?
Speaker 2: I mean, I think for the UK economy, I don't
Speaker 2: think there's anything that's going to blow up. And I
Speaker 2: think that's basically because credit has been more restrictive since
Speaker 2: two thousand and eight, and so households aren't actually overborrowed
Speaker 2: relative to where they were back then. Companies actually aren't
Speaker 2: of the border reactors to be able to work back then,
Speaker 2: and that's why everyone's corked. I mean, there's not been
Speaker 2: happy bank balance sheets again. The banks that are resilient, well,
Speaker 2: I think that the private credit market. I think the
Speaker 2: stuff in the shadow, in the shadow banking sector is
Speaker 2: frightening because the private equity, uh, you know, what are
Speaker 2: the valuations, what are the real valuations that no one
Speaker 2: knows you know, a lot of them. And there's private credit,
Speaker 2: which is a lot of the private credit providers are
Speaker 2: owned by private equity companies, private equity firms who own
Speaker 2: some of the companies in their portfolio that are being
Speaker 2: lent to by the private credit companies. I mean it
Speaker 2: is a there's a sort of incestuous issue of opacity,
Speaker 2: which you know, if you would look somewhere where you go,
Speaker 2: nobody quite understands it what's going to blow up, And
Speaker 2: it's quite a substantial part of the economy. And it's
Speaker 2: one that it feels to me like a potential subprime
Speaker 2: because nobody understands where the risks lie, how big the
Speaker 2: risks are, and when the valuations start falling, how how
Speaker 2: these are declared. And you could get like these big selfs,
Speaker 2: So you could get some kind of real I'd say,
Speaker 2: at the extreme, some financial instability.
Speaker 1: That twenty twenty four, I think forty countries vote. I
Speaker 1: think more than forty countries vote. The UK has to
Speaker 1: vote before end of January twenty twenty five, and then
Speaker 1: you have the US elections. These two would I mean
Speaker 1: it certainly the UK if Labor gets into power changes
Speaker 1: everything about the economy, does it not?
Speaker 2: I actually don't think so. Not in the UK. I
Speaker 2: don't think the difference between the two parties is that
Speaker 2: great anymore, or certainly not the way they're talking. So
Speaker 2: Labor have kind of like obviously been very keen to
Speaker 2: impress upoint business that we are not Jeremy Corbin, you know,
Speaker 2: part two, but.
Speaker 1: We have very little detail.
Speaker 2: Oh yeah, yeah, yeah, absolutely, But I mean there's certainly
Speaker 2: the pitch is that there's not a lot of give
Speaker 2: in the system, so you know, they're going to have
Speaker 2: to be sensible with the finances all that sort of stuff.
Speaker 2: So don't actually think it does change things that much
Speaker 2: from a market view.
Speaker 3: They talk about wanting to be in power for ten years, right,
Speaker 3: and if they come in and they do something which
Speaker 3: is completely contrary to what they're talking about now, they
Speaker 3: will be out and the next vote. I think that
Speaker 3: they're definitely trying to be you know, remodel Blair and
Speaker 3: provide a stable economic backdrop, you know, and actually, in
Speaker 3: a way, I was thinking, our election is going to
Speaker 3: be between at the moments of a managerial prime minister
Speaker 3: who people think is very solid on the economy and
Speaker 3: a managerial Labor party which basically is saying we're going
Speaker 3: to do what he says. And so you have actually
Speaker 3: in a way got the UK for international businesses. That
Speaker 3: would be quite stable because you don't have a al
Speaker 3: Penn or AfD or you know, on the other side
Speaker 3: that's a real threat. I mean, reforms just are sort
Speaker 3: of steal votes from the Tories, but it's not a
Speaker 3: real threat. So that feels quite stable. And then in
Speaker 3: a way also if you think that if Richie, if
Speaker 3: the Tories do come back in but with a very
Speaker 3: slim majority, which is I mean that's the best hope
Speaker 3: that they would have, the risk is that he would
Speaker 3: then be beholden to this kind of extremist right wing
Speaker 3: of the party, which could end up with the Tories
Speaker 3: being more damaging for the economy than a stable, a
Speaker 3: more stable Labor stroke Lib Dem coalition if that's what
Speaker 3: it ended up as well, you know, supply and confidence
Speaker 3: and supply deal if that's I mean, if there's a
Speaker 3: hung parliament yeah, that I would imagine that we would
Speaker 3: end up having another election within within a year or two.
Speaker 3: But the idea that the Tory option is by far
Speaker 3: the safest is I don't think it necessarily stands up
Speaker 3: because that kind of you know, that that wing of
Speaker 3: the Tory Party that just doesn't seem to restrain itself
Speaker 3: at all anymore, is potentially a little dangerous.
Speaker 1: Thank you both so much. Thanks thanks for listening to
Speaker 1: this week's in the City. We'll be back in the
Speaker 1: new year, but in the meantime, check out some of
Speaker 1: our past shows, and do not please do not forget
Speaker 1: to leave a review wherever you listen to podcasts. This
Speaker 1: episode was hosted by me Francine Laquin. It was produced
Speaker 1: by Somersaudi and Tiffany Choy. Additional editing by Blake Maples
Speaker 1: and special thanks to John Stepec and Phil Aldrich.