Suffice it to say that the past year has been relentless for the United Kingdom. Having just started the path to recovery following the pandemic, the UK was dealt another blow, this time resulting from Russia’s invasion of Ukraine. In addition, the backwash of Brexit has been slowly creeping into the equation, making matters worse.
The effects of the Russo-Ukrainian war exacerbated post-pandemic inflation, with figures lingering around 10% in July 2022, putting immense pressure on living standards and consumer confidence. In response, we received Liz Truss’ controversial mandate, which only put more fuel on the fire. We saw the pound sterling at its weakest since 1985, sliding close to parity with the US dollar in September 2022. The gilt market slid into freefall, with the UK 30-year Government Bond price falling by almost 45%.
More recently, we have seen the ongoing strike action by unions such as the RMT, RCN, and UCU for wage demands, putting dents in small businesses and public services. The Bank of England has continued to increase rates to tackle inflation which, expectedly, slumped the housing market. Lloyds who lend around 18% of total UK mortgages, forecasts house prices to fall by 7% in 2023, while Santander and Nationwide predict a 10% and 5% reduction respectively.
In late January of this year, the IMF’s isolation of the United Kingdom as the “only leading economy to slide into recession this year” was the icing on the cake, downgrading their forecast to a 0.6% contraction in UK output during 2023, while the majority of Eurozone constituents were expected to grow.
Since then, however, the sentiment has changed, with many leaders within the industry-altering their 2023 outlook of the UK. So, is the future equally as bleak?
Recently, GfK’s Consumer Confidence Barometer, an index that tracks UK consumer sentiment towards personal finance and economic conditions, reported an inflexion in the tumbling 8-month decline in consumer confidence. Although the score was still depressed, it indicated a potential shift in optimism towards individual finances and the greater economy.
This month we heard from Citigroup, who has forecasted UK inflation to return to 2.3% by November – a significant change from their January forecast. The forecast reflects the fall in household energy bills as wholesale gas prices continue to drop following reductions in delivery costs. The price of delivering gas to the UK has fallen to £1.26 a Therm, an 80% reduction since its peak in August 2022.
This news also comes at a time when CPI has fallen for the past three consecutive months, the ONS has revealed, although it still remains above 10%. The services sector has also proven resilient, the composite purchasing managers index revealed a stronger-than-expected 53 points – returning to pre-pandemic levels.
The release of strong UK data has been priced into the markets this year, the FTSE 100 is up 7.55% since the 30th of December while the Pound has seen rallies against the Euro and Japanese Yen.
While the UK narrowly avoided a recession in 2022, the outlook for 2023 is uncertain. The Bank of England still predicts the UK to enter into a recession this year, although much shorter and less severe than previously anticipated. Others have argued that this forecast is a “worst-case scenario” and that the UK deserves more credit.
Andy Brough, a fund manager at Schroders, told CNBC “The consumer’s still out there spending. Every number is a surprise to the market, is it not? I walk up and down the streets or cycle into work, [and] there’s still lots of people out there, and people are still buying houses, still buying cars, they’re still shopping.”
The UK is not quite out of the woods, but almost every week we hear of surprising data beating expectations. The question is not whether or not the UK will be in a recession in 2023, but how severe will it be. With recent data proving the country’s resilience to economic hardship and many banks upgrading their 2023 forecast by the week, it is increasingly possible that in 2023 the UK exits the trough and begins its journey of recovery.