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  • Writer's pictureEdgar Rayo

Finanze® Weekly Roundup - 23/10/2022

Updated: Oct 24, 2022

Here are this week’s highlights in the UK economy.

Truss sets record for shortest serving PM. After 44 days, Liz Truss has called it quits after pressure from her divided ruling party. Her successor is likely to be elected by next week.

Sunak and Johnson lead the PM race. Supporters of Rishi Sunak and Boris Johnson are confident that they could secure the required 100 backers to be eligible for nomination. So far, only Penny Mordaunt has officially launched a formal campaign.

Moody’s lowered UK’s economic outlook. The credit agency relegated the country’s outlook due to political instability and soaring inflation. Fitch earlier downgraded UK’s credit rating from “stable” to “negative”.

Energy bill freeze cut short. Jeremy Hunt announced that the energy price freeze will only be effective until winter instead of its initial two-year validity.

Sterling rallied against the dollar on the PM’s resignation. The pound regained its momentum to $1.13 on Thursday when Truss announced her decision to leave her post.

Retails sales dropped in September. Consumption activity slowed down, according to the ONS. Retail sales volume dipped by 1.4%, which is 1.3% below the pre-COVID level in February 2020.

Finanze® Foresights:

News of the PM’s decision to leave the Number 10 office was met with relief by the financial community. However, the market is still in a shambles despite the gradual stability it showed this week.

Economist Nouriel Roubini spoke to Bloomberg this week and predicted that a financial and debt crisis will be worse than what occurred in the 70s and warns that “it becomes very ugly.” Roubini, who is known for his grim economic forecasts, believes that things will be worse in Europe, especially in the UK, compared to the US. This leads many to wonder if a housing crash is possible given today’s economic uncertainties and socio-political chaos.

Unlike during the 2008 global financial crisis when home prices fell by -15.6%, the housing bubble that occurred during the pandemic isn’t made up of many unqualified mortgage holders at risk of default. The country’s lending market is now heavily regulated against toxic debt to prevent borrowers from obtaining loans more than what they can afford. The banking system is also much better insulated from risk today in terms of capitalisation.

But these alone won’t guarantee the country from a possible housing market crash. It may be possible though not as tragic as what we had during The Great Recession. Property price growth is expected to slow down before the end of the year due to increasing mortgage costs. This may be good for potential homebuyers with an all-cash offer, but recent homeowners may suffer from negative equity as well.

The debt-to-income ratio also remains high but not as much as in 2008, and lender appetite may take a few more months before it returns to pre-mini-Budget levels.

Furthermore, interest rates are set to continue hiking as the BoE is likely to sustain its monetary tightening up to next year. Add the headwinds brought by the cost-of-living crisis to mortgage affordability and the outlook for next year becomes more downbeat. As Joshua Ellard, Finanze’s Head of Bespoke Finance, states, “Much of the recent turmoil across the UK financial markets has been fuelled by uncertainty. Early indicators would suggest a shift in the right direction, although there is a long way to go to restore confidence in the UK’s government.”

We may be heading into a correction but expect that it won't be as severe as what transpired 14 years ago.

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