The UK economy contracted in Q2 2019 prompting fears that the UK economy could have slipped into recession over the summer, but recent data points to growth resuming in Q3. Political uncertainty is weighing on business investment and the slowing global economy is providing a tough environment for exporters. This means prospects for the economy over the coming quarters will be determined by the mood of consumers. In the current environment, monthly and quarterly data is likely to remain volatile. The underlying trend is one of sluggish growth, which we expect to continue into 2020, before likely acceleration from 2021. This outlook is underpinned by the assumption that there will be an orderly Brexit, following a final extension to the Article 50 deadline into 2020. Ever since the referendum in 2016, movements in the exchange rate have been the clearest indicator of changing perception of ‘no deal’ risks, and the increasing chance of a deal being reached can be seen in the recent appreciation of Sterling.
Bright spots are not limited to the alternative sectors, however. Occupiers have started to regain trust in Central London again after a period of caution since the referendum. Central London is now seeing more space being occupied than vacated in the market, which has not happened consistently since 2016. Previously, take-up was driven primarily by lease events or consolidations, but this changed at the end of 2018. The effect can be observed in the net absorption that has been improving since the beginning of the year. In fact, Q2 2019 was the strongest quarter in terms of net absorption since 2014. Although, this will not benefit all office assets equally, with tenant demand focussed on well specified space in accessible amenity-rich locations. As a result, prime rental growth has moved firmly into positive territory in the first half of 2019.