ECONOMY
GDP: strong Q1, but momentum fading
The UK economy started the year more strongly than expected, with growth supported by domestic demand and services, but that resilience looks increasingly fragile. Political uncertainty, tighter financial conditions and renewed inflationary pressures are likely to weigh on household finances and business investment decisions over the coming quarters, leaving the outlook for the rest of the year subdued.
Jobs growth continues to weaken
Labour market conditions are becoming less supportive, with payrolls falling, vacancies declining and unemployment edging higher. The slowdown is uneven, however: consumer-facing services sectors are showing clearer signs of stress, while office-based employment, particularly the financial services sector, has remained more resilient, reinforcing the divergence between different parts of the economy.
Inflation: near-term relief, renewed pressure ahead
Recent inflation data offered some welcome relief, but the broader picture remains unsettled. Lower energy and food readings helped in the short term, yet rising input costs and an expected increase in utility bills later in July point to higher inflation, even as weaker demand may limit how much those costs are passed through.
Monetary policy: near-term pause, but hawkish bias remains
The Bank of England faces a difficult balancing act between signs of economic slowdown and a risk of material second-round effects in price and wage-setting. Markets have tempered expectations for rate rises after recent weak data flow, but borrowing costs remain elevated. Uncertainty over the policy path continues to act as a constraint on real estate investment decisions.
REAL ESTATE
More evidence of slowing development
The construction sector is in the midst of a structural slowdown. Development conditions are becoming more challenging as weaker construction output, higher build costs, elevated interest rates and uncertain pricing continue to squeeze viability. The result is a market where new supply is likely to remain constrained unless inflation and energy pressures begin to ease more decisively.
Leasing and investment: diverging sentiment
Occupational markets remain more resilient than capital markets, with rental growth and leasing demand holding up better than investment activity. Better-quality space continues to benefit from limited supply and healthy occupier demand, but higher debt costs and uncertainty around pricing are still holding back investment liquidity and keeping transaction volumes relatively subdued.
Is industrial rental growth about to take off again?
Industrial and logistics markets may be among the clearest beneficiaries of a more uncertain global backdrop. Previous periods of supply-chain stress have encouraged occupiers to build more resilience into logistics networks, supporting demand for strategically-located warehouses and increasing upward pressure on rents. While we are unlikely to see a repeat of the exceptional rise in rents seen in 2021-22, the direction of travel is still supportive for industrial & logistics investors.
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