Written by Chris Ayton

The impact of higher UK interest rates is increasingly evident in many sectors of the economy. For example, last week The Insolvency Service released data showing the highest corporate insolvency numbers in the UK since 2009. These are companies that can no longer pay their debts, with construction, hotels and food retail particularly affected in the latest numbers.

Data from the Royal Institute of Chartered Surveyors last week also showed the largest drop in construction activity since the pandemic, when the industry largely came to a halt. This current sharp slowdown is undoubtedly being driven by higher costs of borrowing.

However, according to Nationwide, UK house prices unexpectedly rose +0.9% last month, supported by wage growth and a lack of supply of properties for sale. This was the largest rise since March 2022. However, Nationwide also noted the number of transactions remains depressed and prices are still 3.3% lower than where they were a year ago.  In real terms, i.e., after inflation, the declines are obviously even greater.  Perhaps with one eye on a slowing economic backdrop, the Bank of England kept interest rates on hold last week.

Economic data coming out of Europe last week did not make happy reading either.  Firstly, Germany announced it had unexpectedly fallen back into negative GDP growth in the third quarter.  Eurostat, the EU statistics office, then announced the Eurozone economy had also shrunk in the third quarter with contractions in Germany, Ireland and Austria offsetting growth in Spain, Portugal and France.  Eurozone manufacturing activity also contracted for the eighteenth month in a row, and at a faster pace than seen previously. The one bright note was that this weaker activity, combined with lower energy prices, helped Eurozone inflation fall more than expected to 2.9% year-on-year.  This perhaps supported the European Central Bank’s recent decision to keep its benchmark interest rate on hold at 4%.

With an interest rate driven economic slowdown seemingly taking effect, it remains to be seen if and when the attention of policymakers will turn to supporting growth, rather than attacking inflation. Although Central Banks are supposed to be “independent”, political pressure for a change of course will likely be particularly prevalent in countries where a general election is on the horizon. Clearly, any sense that rate hikes may be behind us will be supportive of the strong total return opportunity we see in high quality bonds.


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All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 6th November 2023. 

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