Following a bleak December, we have started to see some signs of optimism since the new year. Global markets have rallied and wholesale gas prices have reduced, which offers some hope in the midst of the energy crisis. Inflation is starting to cool, although remains at a high level. Interest rates are set to rise again, although many economists believe they won’t go much higher.
There are still challenges ahead, but it’s possible that 2023 will start to see a return to normality.
Further Interest Rate Rises
Interest rates have risen rapidly since December 2021. There have been nine increases to the Bank of England base rate in that time, taking it from 0.1% to 3.5%.
A tenth increase in planned for early February, lifting the rate to 4%. It is believed that rates will peak at 4.25% or 4.5% depending on the economic outlook. Some analysts expect rates to move higher.
Thereafter, it’s unclear for how long interest rates will remain at their peak. We also have yet to see a significant benefit of increased interest rates in terms of cooling the economy. Inflation may have slowed slightly, but it will still take considerable work to bring it back to a normal level. This minor slowdown may be more attributable to lower wholesale gas prices than reduced consumer spending.
How Does Inflation Affect You?
We have all seen the impact of rising prices in our energy, fuel, and grocery bills. Households are inevitably spending more, as well as facing a reduced disposable income over the next few years as tax thresholds remain frozen.
The impact of inflation will depend on how much you spend and where your money goes. For example, household bills have hit an annual inflation rate of 31.2% as of December 2022, while the cost of a typical shopping basket at the supermarket has gone up by 13.1%. Clothing and household maintenance costs have risen by around 10%, and housing, transport, insurance, and technology prices are up by a more modest 4-5%.
Despite a headline inflation rate of 9.2%, core inflation (excluding food and energy costs) has remained fairly steady at around 6%. The problem is that most people spend significant portions of their income on basic necessities, and it is these essentials which are increasing the most.
When prices increase, the logical next step in the cycle is that workers seek a fair wage to keep up with the cost of living. We have seen this playing out in the last few months, with nurses, teachers, postal workers, railway staff, and now Amazon employees taking industrial action. On the one hand, many of these professions have seen years of underfunding and poor conditions, with the cost of living crisis simply being the last straw. But increasing wages can also have an inflationary effect and may put even more pressure on businesses and the economy.
Davos World Economic Forum
It could be said that corporations and billionaires have a greater influence on the global economy than politicians or the general public. So when they get together every January for a controversial conference at a Swiss ski resort, the world pays attention.
The World Economic Forum was started in 1971 and allows its members to come together to discuss important economic and political issues. Attendees include CEOs, heads of state, politicians, journalists, and notable public figures.
Despite challenges in the economy and the market, this year’s conference highlighted some positive developments.
Wholesale gas prices have reduced by around 80%, which may help to keep inflation under control, particularly in Europe. China has ended its zero Covid policy, which could ease supply chain issues since China is the world’s manufacturing hub. The Inflation Reduction Act, introduced in the US last year, aims to reduce the deficit, control prescription costs, and invest in clean energy. All of these developments have potential to improve prospects in the world’s three most significant economic regions.
Overall, the outlook is not as gloomy as it was initially feared, and there are reasonable indicators that the economy will eventually return to a position of stability and growth once the immediate challenges are dealt with.
The UK Market
The FTSE 100 is up by around 4% this month, and is now showing a consistent positive return over 1, 3, and 5 years. The FTSE All Share, which spans the breadth of UK listed companies, has returned 4.4%, indicating that medium and smaller companies have produced even stronger returns, despite their comparatively lower weightings.
Online fashion retailer ASOS has produced positive results this month, with a 60% increase in share price. After a difficult few years, the company is taking steps towards a restructure. Lighting company Luceco has also seen a significant price increase following healthy profit announcements and a reduction in debt.
Airlines and travel companies have also fared well this month, indicating that international travel is now firmly back on the agenda following the pandemic.
Companies which have faced a difficult January include Direct Line Insurance, Dr Martens, and currency printer De La Rue. All three have seen share price dips of 15% – 20%. However, more companies are showing a positive return than negative and the highs are well in excess of the lows.
It is likely that 2023 will be a difficult year for small businesses. As the government is now cutting back on energy subsidies, it is estimated that as many as one in four small companies may have to make significant changes or face closure. The hope is that the reduction in wholesale gas prices will help to ease the energy crisis.
The Global Outlook
The major world markets have all seen positive returns in January as a degree of optimism has been restored.
The North American sector has produced growth of around 3.8% this month. The Inflation Reduction Act has provided a boost as it aims to introduce tax credits for businesses investing in clean energy technology. However, it has proved to be controversial with overseas trading partners who claim it jeopardises competition.
One of the implications of the act is that it is likely to reduce reliance on Chinese manufacturing in the long term. The Asia Pacific sector is up around 8.3% this month as the country gears up its reopening following the pandemic. But if sustainable production in the US becomes more attractive, and if the rest of the world follows, the Chinese economy could be impacted.
Please don’t hesitate to contact a member of the team for more information on any of the topics covered.
The value of investments can fall as well as rise and is not guaranteed. Past performance is not a guide to future performance.
The content in this article was correct on 01/02/2023.
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