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Taking the brakes off Britain?

After months of keeping their feet firmly on the growth brake, Rathbone Income Fund Manager Alan Dobbie asks whether the government and central bank might simultaneously be nudging towards the accelerator.

By Alan Dobbie 27 February 2025

Last year was a frustrating one. We had high hopes that a more stable UK political environment would feed through to ongoing economic recovery that coincided with lower inflation and central bank interest rates. In the event, restrictive rates, combined with a government unwilling to pass up opportunities to highlight the dire economic situation it had inherited, meant the UK was razor close to recession in the second half of 2024.

So far, this year’s domestic economic data has been decidedly mixed. But important supply-side reforms combined with signs of a more dovish Bank of England (BoE) might just turn things around. 

Giving it both barrels 

The government has started 2025 with a remarkable shift in communication strategy. Talk of fiscal black holes and tax hikes have given way to a ‘growth trumps all else’ mantra. As if to demonstrate her seriousness, Chancellor Rachel Reeves has brushed aside Nimbyist and Net-Zeroer concerns by throwing a third runway for Heathrow back on the table. 

Deputy Prime Minister Angela Rayner has emphasised that people, not newts, will be prioritised when it comes to getting new housing through the UK’s sclerotic planning process. 

In a Times article, Prime Minister Keir Starmer even invoked Margaret Thatcher as he promised to “cut back the thickets of red tape” holding back growth. It’s fighting talk! Could it revive animal spirits and boost growth? It’ll take more than words, but from a very low base, it may not need much.

At the same time, the BoE could well be shifting towards a more dovish posture, concerned that high interest rates could be doing more to harm growth than tame inflation. Swati Dhingra, a consistently dovish member of the monetary policy committee, recently explained she favours bolder rate-cutting because “consumption weakness is just not going away.” She voted for rates to be cut by 0.5% in February. More surprisingly, arch-hawk Catherine Mann voted the same way. Her sudden volte-face suggests she’d like to see the committee take a more activist approach. 

Economists are not yet on board with this view. Most expect just three further quarter point BoE cuts this year – not exactly the shock and awe Mann hopes for. But remember interest rates are often said to take the escalator up and the elevator down. 

They could get cut more quickly than many currently expect. As long as it doesn’t accompany a deep recession, that tends to be very good for stocks.

Rate cuts to bolster housebuilders, property and households too

Which areas of the UK equity market would benefit most from a faster pace of interest rate cuts and a growth-focused government? Two sectors stand out to us.

Housebuilders seem an obvious winner. Mortgage affordability is the big driver here, and the past few years have been very difficult indeed. As rates start to fall, that should ease the burden on families and make buying a home more manageable. 

The planning system is the housing sector’s other Achilles’ heel. The chart below shows that number of new housing projects getting the go-ahead from councils in England hit a fresh low in the final months of the last government. 

 

 

Few sector-watchers gave the new government’s ‘mission’ to reform planning much hope, but early signs of action are positive. 

Changes to the National Planning Policy Framework (NPPF) have gone down reasonably well. Housebuilder management teams highlight a change of sentiment within some local authorities and Deputy Prime Minister Rayner has already approved several projects which have spent years stuck in the logjam. It’s early days but there are reasons to be optimistic.

Another sector we’d highlight is specialist REITs (Real Estate Investment Trusts). The so-called ‘Beds, Meds and Sheds’ of student accommodation, primary healthcare properties and logistics/self-storage operators would benefit from a faster pace of rate cuts and government growth initiatives. Not only are many of these companies highly indebted (so would benefit from lower interest payments), but their long-duration cashflows – generated many years in the future – would be worth more in present-day terms if the risk-free discount rate falls. A planning system with a presumption in favour of development rather than against would also help with pipelines for new sites.

Another benefit of falling borrowing costs is that tightened mortgage affordability tends to constrain demand throughout the economy. As more money goes towards servicing the mortgage, there’s less for new cars, meals out, holidays and investing – whether in a new business or stocks on the exchange. 

If that starts to reverse, it should turn the nozzle on more household spending and – perhaps – more investment flows from Brits. 

There’s precious little optimism priced into UK markets. We think that’s a big opportunity for investors.

 

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