Client Update - 10th February 2023

Well, that was close. The UK has narrowly avoided a recession for now – ending up flat over the third and fourth quarters of 2022. The chancellor Jeremy Hunt quickly declared that this showed the UK economy was more resilient than many expected, but December 2022 was still a weaker month than predicted, partly due to a striking workforce and a break in Premier League football for the world cup.

This is promising news, although we remain mindful that the UK economy is still 0.8% below the same period in 2019. In contrast the US economy is 5.1% higher and even the Eurozone has grown by 2.4%, despite all the issues experienced in 2022. The Bank of England has stated that it expects the UK economy to contract in 2023 and in the first quarter of 2024 as inflation remains much higher than in the last twenty years and higher interest rates weigh on public spending. For now though, as in most of 2022, the UK economy seems to be holding on stubbornly. We must remember that despite a little gloom in these predictions, gas prices have fallen significantly from last year and inflation has started to gradually roll over.

Yesterday the Bank of England governor Andrew Bailey spoke again about how the bank expects inflation to fall to 4% by the end of the year and he focused on this fact when asking public sector worker pay deals to be mindful of this. This echoed the bank’s own policy whereby it has agreed to offer its own staff a 3.5% pay rise with a one off top up of 1%. He also spoke at length about his concerns over higher private sector wage setting in the UK and its negative impact on fighting inflation.

This new world of tighter monetary policy is a far cry from the last fifteen years. Since 2008, the US Federal Reserve interest rate and balance sheet policy has decoupled asset prices from risk, and encouraged both companies and households to use a high level of cheap debt. Comparing the decade after the great financial crisis to the decade before, the growth in US debt held by the public was nearly 500 per cent larger, the growth in nonfinancial corporate loans and debt securities was about 90 per cent larger, and the growth in consumer credit — excluding mortgages — was roughly 30 per cent larger.

Despite this change in monetary policy, 2023 has already shown that if the central bank narrative remains firm, but ultimately of a dovish nature, then markets can continue to make up for the lost ground of 2022. Do have a good weekend.