The recovery is upon us, but the economy needs to stick it’s ‘soft landing’

We’re ending what has been a bumpy and sometimes bruising year for the UK investment market on a more optimistic note. After three quarters of the year investment volumes were 9% ahead of last year’s lows. Our very early read of Q4, alongside the return of some bumper December deals, suggests we will finish 2024 comfortably ahead of 2023’s £32bn invested, and perhaps even a little beyond our consistent expectation of £35bn.

The market is well and truly in recovery mode, and the gradual, incremental improvements we have projected are materialising. The foundations of this recovery are rooted in the economy. Having begun the year in recession, growth returned during the first half, with UK GDP expanding by more than 1% across Q1 and Q2 combined. Inflation has been put to bed, with UK CPI growth comfortably within the target range for six months now and forecast to remain so for the foreseeable future. The Bank of England have started to respond, with rate cuts of 25 bps in each of September and November, beginning to bring down borrowing costs from the prohibitive peaks that had been slowing the market.

As we move into 2025, our base case is for this momentum to continue, and further increases in activity to follow. However, it is imperative that the economy remains supportive of the recovery. Recent data points have displayed the continued fragility of the economic landscape, with last week’s initial estimate of negative output growth in October following a similar print in September. We have also seen the return of increased volatility in the bond market over recent months, in anticipation of, and immediately following, the government’s Budget. These factors highlight the increasingly urgent need for greater policy support.

The Bank of England have proven hawkish throughout the recent cycle, moving rates higher than anticipated, and arguably higher than was needed to tackle inflationary pressures that were predominantly external. The messaging around the scale and speed of rate reductions has been very cautious, and if as anticipated we see a hold at this week’s meeting of the Monetary Policy Committee, the pace of reductions is significantly lagging other major central banks.

The European Central Bank have now cut rates four times this year from a substantially lower starting point, with the headline deposit rate now standing at 3%. If the Bank does hold base rates at 4.75%, the UK will close the year with a spread of 175 bps to the Eurozone, higher even than the 125 bps spread at peak rates. Reasons for this dislocation are limited.

In the US, the Fed are also widely expected to cut again this week, which would bring total reductions for the year to 100 bps. This is despite the potentially inflationary nature of many policies of the incoming administration, and most importantly sustained strong output growth. Weaker relative UK growth is causing currency impacts, with the USD/GBP rate dropping from the mid-1.3 range to the mid-1.2s in the last couple of months. Given the UK’s negative trade balance, weak currency could fuel inflationary pressure of exactly the kind the Bank are trying to avoid.

Governments, policymakers, and markets are all seeking the fabled ‘soft landing’ for the economy, bringing cost pressures under control while avoiding stagnation. We are very close to achieving this. In the UK, a significant remaining piece of the puzzle is to bring monetary policy towards equilibrium. No one yet knows what this will be, but between 2% and 3% is likely. The time has come to push quickly towards those levels and snap the economy back to growth. Even if a surprise pre-Christmas cut does come, we will still need more in the new year to reinforce growth and underpin confidence. The real estate market will follow, and 2025 will be a better year than 2024.