UK house price growth slows, as household income squeeze deepens – business live | Business

The European Central Bank plans to ask euro zone lenders to factor a possible recession into their business plans and will use this new calculation for approving
dividend payout proposals, ECB bank supervisor Andrea Enria said today.

Reuters has the details:

The ECB continues to project solid economic growth for this year and next but has argued that an escalation of Russia’s war in Ukraine, which could lead to a cut off in gas supplies could in an adverse scenario drag the euro zone into a deep recession next year.

“We will propose to ask banks to recalculate their capital trajectories under a more adverse scenario, including also potentially a gas embargo or a recessionary scenario, and use this also for the purpose of vetting their distribution plans going ahead,” Enria told European Parliament committee.

Inflationary pressures have pushed Sweden’s central bank into its largest interest rate rise in two decades.

The Riksbank has just hiked its benchmark rate to 0.75% from 0.25%, and warned that it expects to keep raising borrowing costs. It has also decided to unwind its asset purchase scheme faster than previously planned.

Announcing the 50 basis-point rate hike, it says:

The Executive Board’s forecast is that the policy rate will be raised further and that it will be close to 2 per cent at the start of next year.

The Executive Board has also decided that, in the second half of the year, the Riksbank’s asset holdings shall shrink faster than was decided in April.

The Riksbank said that the Ukraine war, and China’s pandemic lockdowns, have pushed up prices for energy, various input goods and food, prompting firms to hike their prices — some ‘unusually strongly’.

Just like in other countries, price rises in Sweden have now spread increasingly and prices for goods, food and services have been rising considerably faster than expected since the start of the year. Companies’ costs have increased rapidly.

The strong demand has made it possible to pass them on to consumer prices. There are also signs of changed price setting behaviour in that companies have raised prices unusually strongly in relation to how much costs have increased.

Today’s losses mean European shares are set for their worst quarter since the first three months of 2020, at the start of the pandemic.

The continent-wide Stoxx 600 index has dropped 1.5% today, taking its losses in April-June to over 10%.

The rise in French inflation to a new record added to concerns that central banks could tighten monetary policy aggressively to cool prices, risking a recession.

Ben Laidler, Global Markets Strategist at social investment network eToro, says there have been “few hiding places” for investors this year.

Driven by a one-two punch of high-for-longer inflation and aggressive central banks, followed by surging recession fears, US and global equities plummeted over 15%, Bitcoin more than halved and both bonds and commodities fell. Only China rose, among the biggest markets, and the US dollar, among asset classes.

“Now the race between peaking inflation and a recession is going to make for a long, hot summer. However, with financial conditions significantly tightening and economies slowing, US inflation should soon peak.

This will hopefully allow the Fed and other central banks to slow their hiking pace before a recession becomes inevitable, though the ECB faces an even tougher task of an interest rate lift-off with high-for-longer oil prices and a grinding Ukraine conflict.

Inflation in France has jumped to a record high.

Consumer prices in the eurozone’s second-largest economy climbed by 6.5% per year in June on an EU-harmonised basis, official preliminary figures show, up from 5.8% in May.

Prices rose by 0.8% in June alone.

Statistics agency INSEE said food and energy prices had risen sharply due to disruption resulting from Russia’s invasion of Ukraine.

Markets fall as global downturn worries rattle investors.

Japan’s worst factory output slump in two years

In better economic news, UK car production has risen for the first time in 11 months.

Some 62,284 units left factory gates in May, up 13.3% compared with April, and the first monthly rise since June 2021, according to the Society of Motor Manufacturers and Traders.

Battery electric car production more than doubled (up 108.3%) with 4,525 built in May, to meet rising demand for greener vehicles.

But so far this year, overall output has decreased by 23%, as shortages of semiconductors hampered carmakers.

Mike Hawes, SMMT chief executive, said:

“May’s return to growth for UK car output is hugely welcome after 10 months of decline, indicating the sector’s fundamental resilience.

Any recovery, however, will be gradual as supply chain deliveries remain erratic, business costs volatile and geopolitical instability still very real.

Worryingly, UK business investment has continued to fall.

Business investment dropped by 0.6% in January-March, today’s UK GDP report shows, which takes it 9.2% below its pre-coronavirus level.

There was continued weakness in capital expenditure on transport equipment during the quarter, due to supply chain constraints, particularly the continued semi-conductor shortage.

This latest drop in UK household real incomes leaves people less protected for the economic problems ahead, with the risk of a recession.

Paul Dales of Capital Economics explains:

The final Q1 GDP data perhaps leave households looking a bit more vulnerable to the big fall in real incomes that’s going to hit in Q2 and Q3.

Although GDP and consumer spending won’t fall as far as real incomes, it’s pretty clear the economy is going to be very weak for a while and a recession is a real risk.

Real incomes have now declined modestly in each of the last four quarters, Dales adds, with more pain ahead:

This meant that the saving rate stayed at 6.8% rather than rise to 7.2% as we had forecast.

That leaves households with a slightly smaller buffer than we expected to cope with the much bigger falls in real incomes that are going to hit in Q2 and Q3 due to the surge in inflation. In 2022 as a whole, we think real incomes will decline by around 2.0%.

UK household incomes suffer longest run of declines on record

Guy Harrington, CEO of Glenhawk (which provides bridging financing) says it’s ‘absolute madness’ to think house prices will keep rising in the current climate.

He warns:

“Another month of slowing growth is just a precursor to the sharp correction about to torpedo the UK housing market, caused by a perfect storm of record inflation, geo-political turmoil, rising rates and a once-in-a-generation cost of living crisis.

It’s absolute madness to think house prices will keep on rising. As caution grips the market, the outlook for 2023 looks increasingly ominous.”

The current double-digit annual house price growth doesn’t seem sustainable in the long run, given economic pressures.

So says Myron Jobson, senior personal finance analyst at interactive investor:

Property prices have gone up faster than wages, creating an affordability squeeze, while mortgage rates have risen to levels we haven’t seen in a while. These factors, as well as the prospect of higher interest rates to rein in runaway inflation, are likely to go some way towards taming frothy housing prices.

“The housing market has already begun to show signs of cooling. Mortgage activity has started to come down, falling back towards pre-pandemic levels in April, and new buyer enquiries has waned – which is indicative of the inflationary pressures currently exerted on household budgets.

But a slowdown is more likely than a property market crash, Jobson predicts, given the imbalance between supply and demand.

House price growth continues to “drift downward” in response to mounting pressures in the broader economy, says Nicky Stevenson, managing director of national estate agent group Fine & Country:

“Increased borrowing costs have come at a time when disposable incomes are already shrinking and the UK is edging closer to recession.

“These pressures are bound to stretch affordability in the months ahead with inflation still to peak and more aggressive monetary tightening now being signalled by the Bank of England.

“A tight labour market and the ongoing supply crunch will continue to mitigate this cooling effect with overall gains remaining robust by historical standards.”

London remains the weakest performing region for house price growth since the start of the pandemic.

The South West saw the largest increase, as people looked for larger, more rural properties in the move to home-working.

Nationwide reports that:

Since 2020 Q1, average house prices in the capital have increased by 14.9%, whilst all other regions, except the Outer Metropolitan, have seen at least a 20% uplift.

“The South West was also the strongest region over this period, with a 27.7% increase, after taking account of seasonal effects, followed by Wales, where average prices rose 26.2%. Meanwhile in the North West, prices were up 25.8%.

House prices across the South West jumped 14.7% year-on-year in the last quarter, as it overtook Wales as the strongest performing region in Q2

It was followed by East Anglia, where annual price growth remained at 14.2%, Nationwide reports.

Wales saw a slowing in annual price growth to 13.4%, from 15.3% in the first quarter.

Price growth in Northern Ireland was similar to last quarter at 11.0%. Meanwhile, Scotland saw a 9.5% year-on-year rise in house prices.

Introduction: UK house price growth slows in June