The UK economy has so far just avoided recession but following growth of 0.4% in January, the economy failed to grow at all in February.
In the three months to the end of February, the economy grew by just 0.1%. The Monetary Policy Committee’s (MPC) latest forecasts published in February suggest that GDP will fall slightly throughout 2023 and into Q1 2024, as high energy prices and interest rates restrict consumer spending.
In Q1 2023, All Property total returns, as recorded by the MSCI Monthly Index, reflected a rapid improvement in market conditions and increased to 0.2% from -14.5% in Q4 2022. Capital growth was -1.2% in Q1 compared to -15.6% three months earlier. However, in the 12 months to the end of March 2023, All Property total returns decreased to -14.7% from -10.1% in the 12 months ending December 2022.
Following its April meeting, the MPC announced a further rise in base rate to 4.25%. The pricing of UK risk free assets has largely recovered after the UK Government rowed back on its short lived but reckless experiment with unfunded tax cuts. The yield on the 5-15 year gilt index has hardened by 23 bps since the end of last year and 69 bps since September 2022 to stand at 3.51% at the-end of Q1.
We expect weak market conditions to persist at least for the first half of 2023. We have therefore maintained our forecast All Property total return for 2023 at -6%. However, if the current short-term improvements in market conditions persist the outcome could surprise on the upside. All Property total returns could recover sharply in 2024 and reach 15% if some of the recent yield de-rates are unwound. Thereafter markets should return towards an equilibrium level. The net effect is that the annualised average forecast for the three years ending December 2025 could be around 5%.
