Q4 2023 business plan assumptions

¹ Based on rent standard 2020 at CPI +1.00% (from FY 2020–FY 2025)

² Average expected rates for the financial year (April-March)

Economic developments

GDP and growth

• U.K. GDP shrank 0.30% in October, setting a weak start to the fourth quarter.
• While all three sectors posted declines in output, the services sector was the primary driver behind October’s GDP contraction with -0.20% growth.
• As month-over-month GDP tends to be volatile, assessing quarterly output provides useful insight into broader trends.

• In the quarter to October, output was flat while the quarter to September registered -0.10% growth (previously estimated to have grown 0.20%). The contraction was reported to be a result of poor business investment and household spending.
• Private sector business activity, measured by the Purchasing Manager Index (PMI), regained strength in the fourth quarter following contractionary (sub-50) readings in the third quarter.
• Composite PMI rose to 52.10 in December, largely driven by services (53.40), while manufacturing (46.20) failed to escape contraction territory.
• According to private sector services companies, consumer demand rebounded in the final months of last year, driving an increase in new orders.
• Nevertheless, services PMI reports over the third quarter, and the fourth quarter emphasized a continued increase in input costs fueled by labour costs, which was then passed on to customers.
• It aligns with trends seen in average pay and service inflation data, which remain high by historic records.
• Looking ahead, some economists forecast that business tax cuts announced as part of the Autumn Statement will position the U.K. for growth, while others project that weak investment, lacklustre productivity, and the full impact of high rates on households will suppress growth prospects.

Labour market

• Annual regular pay grew 7.30% in the quarter to October. Including bonuses, wages increased by 7.20%. While these mark some of the highest growth rates on record, it is partly influenced by base effects when comparing to lower pay growth in the same quarter the year prior.

• According to ONS, contrasting the most recent quarter against the quarter preceding it and annualizing, this change would result in a regular pay growth of 4.20% — suggesting pay growth has retreated in recent months, providing better short-term context relative to the headline rate.

• In line with the third quarter, labour demand continues to decline, with vacancies falling for the 17th consecutive period and moving closer to its pre-pandemic position of 600–800 thousand.

• Furthermore, the latest PMI report serves as another data point for the private sector, where managers have reported reducing hiring and/or not replacing leavers.
• Due to the decreased reliability of the Labour Force Survey, the ONS has resorted to alternative estimates for the unemployment rate. According to this measure, the unemployment rate was 4.20% in the quarter to October.
• While initial signs of a slowdown in labour demand are apparent, the BoE remains vocal regarding the historically high levels of pay and its reluctance to consider rate cuts until there is a consistent trend of pay-growth easing.
• This may occur if the falling labour demand and higher business costs lead to a decline in average pay over the next year.

Inflation

• The slowing trend in price rises seen in the third quarter continued into the fourth quarter, with CPI falling to 4.60% in October and 3.90% in November.
• November’s reading was well below economists’ consensus of 4.40% and marked the slowest pace of CPI growth since September 2021.
• Falling energy prices have been the primary influence on headline CPI retreating. Base effects have favoured annual comparisons, with the steep energy price cap increase implemented last October now dropping out of the CPI basket.
• Food prices have also contributed to disinflation, with food and non-alcoholic beverage inflation easing for the eight consecutive month to 9.20% in November from a peak of 19.20% in March 2023.

• Other price gauges have indicated a slowdown in inflation. The BRC-Nielsen Shop Price Index dropped to 4.30% in December — its lowest since June 2022. Food inflation, as measured by the BRC, declined to 6.70% in December, marking the lowest level in 18 months.
• Core CPI (CPI excluding food, energy, alcohol, and tobacco), had shown more resistance to reducing in the third quarter but fell to 5.10% from 5.70% in the prior month. Similarly, services CPI, which serves as a measure of domestically generated inflation, had not seen a decline in growth to the same extent as goods CPI. In November however, it posted a drop to 6.30% from 6.60% in October.
• November’s CPI suggests that the BoE’s projection of modal CPI in the fourth quarter of 2023 was at 4.60%, per the most recent Monetary Policy Committee (MPC) report, was rather conservative.
• Further easing in CPI, especially core and services as closely observed by the BoE, may prompt the Central Bank to an earlier commencement of rate cuts. Though, it should be noted that the U.K. lags behind other economies who have lower inflation and have not commenced rate cutting yet.

Housing market

• The U.K. housing market has been met with a challenging economic backdrop over the past year and a half with households facing both price inflation and a material increase in borrowing rates as legacy fixed rates mature.
• House prices have suffered as a result. Halifax and Nationwide reported annual house price growths of -1.00% and -2.00% respectively in November. Both indexes have posted moderate monthly house price rises in recent months, owing to the drop in mortgage rates observed in the second half of the year.
• The ONS House Price Index, which accounts for mortgage but also cash buyers, declined 1.02% on an annual basis in October.
• The House Price Index suggests that the housing market has been more resilient than expected — though this has been attributed to lower supply relative to demand.
• Looking ahead to 2024, a decrease in mortgage rates is expected to continue. At the same time, housing affordability remains difficult due to higher mortgage rates relative to historical standards. As such, it is uncertain how much falling mortgage rates will lead to any notable increases in house buying activity.

Interest rate developments

Monetary policy

• In its final meeting of the year, the BoE's MPC voted six-to-three to hold the U.K. Bank at 5.25% for the third consecutive time.
• The BoE remains unwavering in their commitment to returning CPI to target, emphasising that any rate cut talks will be too early.
• As of December, market expectations per the implied forward curve suggest a gradual decline in the bank rate from spring this year.
• The European Central Bank (ECB) held their deposit and refinancing rates at 4.00% and 4.50% respectively. While the bloc has seen lower inflation than the U.K., the ECB maintains that rate cut considerations are not currently on the table, as they wait for continued evidence of slowing inflation and a labour market.
• The U.S. Federal Reserve also voted to keep their target rate unchanged, with the upper target at 5.50%. The Central Bank stated that they would consider any additional tightening that may be appropriate to return inflation to 2.00%, interpreted by markets as a likely end to further hikes.
• Furthermore, the Fed’s projection of future rates, the “dot plot”, showed three possible rate cuts by 2024-year end, as of their December meeting.

Market rates

• Markets rallied significantly over the second half of December, owing to a shift in sentiment from investors on chances of further and deeper rate cuts from the Fed over the course of 2024.

• A "deep cut" policy would have marked a significant shift from the "table mountain" narrative that persisted through the fourth quarter, where rates were expected to remain at their current levels for longer to stamp out inflation.
• As a result of the rally, gilt yields and swap rates fell by 65–75 bps between 1 December and 27 December.
• There has since been a moderate reversal as recently released minutes from the Fed’s December meeting showed that the Central Bank is uncertain about how soon it will commence any rate cut.
• While markets have sold off at the start of January, rates remain between 25–45 bps below their early December levels, which has helped drive significant new issue activity at the start of 2024.

Funding markets

Capital markets

• New issue activity for housing associations (HAs) remained relatively quiet in the final months of the year, with more private placement deals than public.
• The majority of the public primary and secondary transactions over 2023 benefitted from EMTN programme flexibility and the ability to respond relatively swiftly to market opportunities.
• Performance on shorter-dated deals (c. 10 years) from AHGS and certain utilities suggests that there is investor demand for shorter-tenure notes without spreads widening materially.
• There has been an influx of public issues in the European capital markets to start the year, with €108B sold as of 10 January, split €65B Sovereign, Supranational and Agency (SSA)/ €31B financial institutions/€12B corporations.
• New issue premiums (NIPs) have widened slightly on the rush of supply. However, issuers are still likely to save on an all-in basis given how much we have seen gilt yields fall.
• Secondary spreads have also remained tighter following December’s rally and have not followed benchmark yields wider.
• We expect capital market's deal volume for HAs to recover as borrowers need to fulfil refinancing obligations. Many of these commitments have been temporarily extended, necessitating the raising of new debt.
• HAs can benefit from setting themselves in position to issue swiftly when more favourable market conditions arise.

Banking market

• Bank lenders remain relatively positive towards the sector across the various funding sources.
• However, there are growing concerns related to the credit quality and, in some cases, regulatory risks facing certain social landlords.
• There has been inconsistency on terms offered across lenders as certain banks are quoting comparatively expensive indicative terms, regardless of the strength of the credit.
• Whilst Chatham has seen high-quality, competitive offers on the five-year tenor for strong credits from certain lenders, others are widening margins regardless of the credit standing of the borrower.