February 2023: what is happening in the UK economy?
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The UK has narrowly avoided a recession, according to Chancellor Hunt, after seeing flatlined GDP growth in the last quarter of 2022. The economy, it seems, has proven more resilient than thought. Moreover, the stock market has held up remarkably well, with the FTSE 100 recently attaining a record high. Inflation is also expected to “cool down” later in 2023 due to wholesale energy price falls and cheaper imported goods. With more good news in the headlines, should investors feel more confident about the year ahead in 2023? Are there any strategic implications for portfolio planning? Below, our Grantham financial planners at Castlegate offer some ideas. If you want to discuss your own financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
info@casfin.co.uk
February 2023: what is happening in the UK economy?
Whilst the UK has avoided recession (for now), the UK is still facing a slow recovery following the COVID-19 pandemic. Since Q4 in 2019, GDP growth has neared -0.8%. By contrast, other major economies have grown such as Germany (0.3%), Japan (0.9%), Canada (3.0%) and the USA (4.3%). Many reasons can be given for this disparity. One factor is rising wholesale energy prices, which have affected the UK particularly badly due to our high reliance on gas boilers and poor insulation. Higher inflation has led the Bank of England to raise interest rates, which stand at 4.0% in February 2023 compared to 3.0% from the European Central Bank (ECB).
Another driver behind the UK’s flat GDP growth in late 2022 was political turmoil. In particular, the short-lived Truss/Kwarteng “Mini Budget” led to temporary panic in the bond market and has almost certainly undermined confidence in the UK economy. Although U-turns soon arrived from new leadership under Rishi Sunak and Jeremy Hunt, inflation continued to rise. Higher prices have contributed to recent strikes in the public sector (e.g. teachers, civil servants and rail workers), where workers want their wages to keep up with rising living costs.
More positively, however, inflation is expected to start coming down in 2023. The initial shock from Russia’s invasion of Ukraine (leading to energy sanctions and driving up prices) should, hopefully, work its way through the system – assuming no further escalations. Around 300,000 more workers could rejoin the labour market in 2023, potentially closing the productivity gap with the USA. Targeted government schemes for Ukrainians, Afghans and Hong Kong residents could also add £19bn to £30bn to real GDP in 2023.
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What is happening in the markets?
2023 could be a challenging year for global stock markets. Consumers who enjoyed a “cushion” of savings from COVID-19 support schemes will likely be depleted (if not done already), putting greater pressure on households to cut discretionary spending in an environment of high prices. However, consumers must continue to buy “staples” such as food and energy – sectors which make up a large portion of the UK’s primary stock market (the FTSE 100). With energy bills for households likely to remain high in 2023 (despite the expected fall in inflation), this could shore up profits for British oil giants. The UK stock market is also unique in offering a large range of dividend-paying stocks to investors. Indeed, the average yield of the FTSE 100 today is 3.7% whilst for the US-based S&P 500, it is 2%. Many of these companies offer attractive valuations and are well-positioned to weather inflationary pressures.
UK house sales for 2023 look “uncertain”, according to one property builder. First-time buyers are struggling with higher mortgage rates. Yet interest rate increases are also putting downward pressure on house prices (e.g. leading to some people downsizing to more “affordable” homes and buy to let investors seeing rental yields eroded). This is a reminder of the cyclical nature of house-builder stocks and how their fortunes are heavily tied to the health of the UK economy. Therefore, despite the attractive valuations and dividends these might offer, consider speaking with a financial planner about if you should – and how to – integrate them into your portfolio.
The fortunes of emerging markets are very dependent on China, where economic growth could rebound to 4.9% in 2023 following the abandonment of the government’s “Zero-COVID” policy. The USA, which accounts for over 60% of the world’s stock market value, could see weakening fundamentals in 2023 as financial conditions continue to “tighten”. As the saying goes, when the USA “sneezes” the rest of the world “catches a cold”, so investors will need to watch economic and market conditions carefully in the coming months. Working with a financial planner can help you build a diversified, resilient long-term portfolio which helps you minimise the risks contained within specific markets.
Whatever lies ahead for investors in 2023, be careful not to try and “time the markets”. Nobody can accurately predict the future. The last two years remind us that unexpected events can catch investors by surprise (i.e. COVID-19 and Russia’s invasion of Ukraine). Whilst a financial planner can help you account for short-term trends and conditions in your portfolio rebalancing, he/she can also guide to towards thinking over the long-term – building and preserving wealth in a way that respects your goals and risk tolerance.
Conclusion & invitation
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
