Despite a satisfactory performance by the UK economy so far this year, the risks of a recession are increasing.
The annual rate of inflation has increased to 9.4%, the highest rate since 1980-81, causing a cost-of-living crisis. Interest rates have risen from 0.1% in November 2021 to 1.25% and are likely to rise further to 1.75% in early August. The OECD is forecasting that the UK alone among the G7 nations could have zero growth in 2023; and the latest MPC forecasts suggest that the onset of recession is possible towards the end of this year or early next year.
World stock markets have fallen sharply. The MSCI World Index lost 10.4% in Q2. The NASDAQ which contains the listing of many of the major tech stocks was down 22.0%. Some of these big tech stocks have fallen further. Reacting to falling subscriber numbers, Netflix was marked down 53% and Nvidia, a global leader in artificial intelligence hardware and software, fell 44%. And, Prologis, the largest logistic and warehouse real estate company in the world, suffered a further 27% fall in its share price having fallen 4% in Q1. The FTSE 100, however, with a large representation of oil and commodities stocks only fell -1.8%.
The heat is slowly coming out of the UK commercial real estate market as it faces up to the risks from geo-political events, high inflation, interest rate rises, turmoil in other global financial markets and a cost-of-living crisis. In June, quarterly All Property total returns, as recorded by the MSCI Monthly Index, decreased from 5.6% in March to 3.8%, reflecting an annualised rate of 16.1%.
Year to date performance has already reached 9.6% but we expect that the market will now slow in the second half of the year. Accordingly, we have downgraded our forecast All Property total return for 2022 from 12% to 11%. The momentum built up by retail warehousing and industrials will continue through to the end of the year, but the remaining segments are expected to under-perform the market average. We have also reduced our forecast for 2023 from 7% to 4% reflecting the weaker economic background. The net effect is that the annualised average forecast for the 3-years ending December 2024 is reduced from 8% to 7%.