LondonFinance1
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Management Consulting
To check on my predictions for this year https://canarywharfian.co.uk/threads/my-economic-predictions-for-2023.705, I will try to review the past month from an economic point of view, hopefully every month from now on.
Signs of Hope for Recovery in 2023
While January is usually a somewhat slow month because of the Christmas holidays in most of the world, there are signs of hope for a quicker than expected recovery, and that things in 2023 might not turn out as bad as feared.
Inflation Remains High but Stable
While rates of inflation remain high at levels not seen for years or even decades, forecasts and market expectations are that inflation will be stable in 2023 in most large economies https://www.ft.com/content/088d3368-bb8b-4ff3-9df7-a7680d4d81b2. (Note that a stable or even falling rate of inflation still means that things are getting more expensive; you would need deflation for prices to drop.) While companies are posting record revenue, some of that can be explained by higher inflation, so you would need to look at profits or earnings as costs have also increased, and some companies do not fare as well https://www.economist.com/business/2023/01/22/big-business-is-in-for-a-rough-earnings-season. Inflation is usually calculated based on a basket of goods and services that an average consumer purchases. Should you not be an average consumer, you might be affected more (or less) by inflation than the official rate implies. It is also not uncommon for inflation estimates to be corrected after a year or so, so I would always look for trends rather than absolute figures when making decisions. That being said, the current levels of inflation are so high that even a correction of a percentage point will not change the story.
Interest Rates Stay High
Interest rates remain at high levels compared to the last couple of years and will probably stay at these levels as long as inflation remains higher than central banks' mandates prescribe. Strictly speaking, it is February now, but you will have seen the news of a rate increase by both the Fed and the Bank of England, and there is the expectation of at least one more increase, but also that rates will plateau this year https://www.bbc.co.uk/news/business-57764601. Why does this matter? It increases the cost of capital, so it might dampen investment and eventually growth, which will hurt the UK especially hard as there has been a lack of investment and low productivity (see below). It will also keep share prices low (if your savings account pays interest, you might not want to buy shares). This is a global phenomenon—even the Bank of Japan is going to tighten its monetary policy https://www.bloomberg.com/news/arti...r-sinks-after-boj-surprises-with-policy-tweak, so let’s see next month how this has developed, both on a global and a national level.
Energy Prices Falling
While retail energy prices might not have fallen yet (partly because they did not go up as much as prices on world markets, and utilities usually hedge against price increases), we have seen natural gas prices fall by 44%. Spot and forward prices might develop differently, but one of the main drivers of inflation in recent times has fallen significantly, almost to levels before Russia started the war in Ukraine. Oil prices (Brent) have fallen slightly by 0.7% as well. This brings some welcome respite to inflationary pressures.
Share Prices Rebound in January
Share prices have seen decent growth in January (Dow Jones +3.2%, NASDAQ +11.9%—it tends to be more volatile than non-tech indices—FTSE 100 +3.4%, German DAX 40 even +10.2%), but it remains to be seen if this is part of a longer rally https://www.economist.com/finance-a...llying-markets-suffer-from-a-doveish-illusion. Compared to the 2022 performance of falls by as much as 20% or 30%, this is some welcome respite. Should this trend continue, and you have a regular investment plan https://canarywharfian.co.uk/threads/personal-finance-budgeting-and-saving-for-retirement.708/, you might see a decent performance of your portfolio again soon as you kept on buying through a period of low prices (back to a performance trajectory as before).
Bitcoin and Cryptocurrencies Surge
If you are into more adventurous investments, Bitcoin (and also other cryptocurrencies) has gained almost 40% in January, and it seems that its price is somewhat correlated with NASDAQ, so it might not be an investment decoupled from other asset classes after all https://coinmarketcap.com/alexandri...l-Reserve-Enforces-Smaller-Interest-Rate-Hike.
China's Reopening and Its Impact
It remains to be seen what China’s reopening after years of strict Covid lockdown brings https://www.reuters.com/breakingviews/chinas-reopening-generates-mirage-normality-2023-01-27/—in the medium term, commodity prices should rise, and it will go back to its usual growth trajectory, but you could make the argument that the current wave of Covid cases puts a damper on growth in the first quarter. This could also give a boost to companies exporting a lot to China, especially in continental Europe, and lift the eurozone out of a potential recession. Worst-case scenario would be the emergence of a new variant among the hundreds of millions of cases currently being reported.
UK Economy's Poor Outlook
As for the UK, things are not looking good—the IMF forecasts the slowest growth (read: contraction) of any large economy, even slower than Russia https://news.sky.com/story/uk-econo...eloped-world-this-year-imf-forecasts-12799201. It seems that Brexit is finally biting, but Britain is also more dependent on gas than other countries, and there is very little public investment https://news.sky.com/story/why-does-the-uk-fare-so-poorly-in-the-latest-imf-forecast-12799691. Bear in mind that the UK has also seen a lost decade without any productivity growth https://www.cambridge.org/core/jour...nprecedented/287949348D9BBA0223B3EA7E532C4B22. On the positive side, inflation has dropped a bit but is still in the double-digit figures https://www.theguardian.com/business/2023/jan/18/uk-inflation-dips-people-continue-to-feel-pinch, so you can understand the reasoning behind the strikes in the public sector. It means that there has been an income cut in real terms (i.e., after inflation), so to catch up with inflation big increases in pay are needed.
Signs of Hope for Recovery in 2023
While January is usually a somewhat slow month because of the Christmas holidays in most of the world, there are signs of hope for a quicker than expected recovery, and that things in 2023 might not turn out as bad as feared.
Inflation Remains High but Stable
While rates of inflation remain high at levels not seen for years or even decades, forecasts and market expectations are that inflation will be stable in 2023 in most large economies https://www.ft.com/content/088d3368-bb8b-4ff3-9df7-a7680d4d81b2. (Note that a stable or even falling rate of inflation still means that things are getting more expensive; you would need deflation for prices to drop.) While companies are posting record revenue, some of that can be explained by higher inflation, so you would need to look at profits or earnings as costs have also increased, and some companies do not fare as well https://www.economist.com/business/2023/01/22/big-business-is-in-for-a-rough-earnings-season. Inflation is usually calculated based on a basket of goods and services that an average consumer purchases. Should you not be an average consumer, you might be affected more (or less) by inflation than the official rate implies. It is also not uncommon for inflation estimates to be corrected after a year or so, so I would always look for trends rather than absolute figures when making decisions. That being said, the current levels of inflation are so high that even a correction of a percentage point will not change the story.
Interest Rates Stay High
Interest rates remain at high levels compared to the last couple of years and will probably stay at these levels as long as inflation remains higher than central banks' mandates prescribe. Strictly speaking, it is February now, but you will have seen the news of a rate increase by both the Fed and the Bank of England, and there is the expectation of at least one more increase, but also that rates will plateau this year https://www.bbc.co.uk/news/business-57764601. Why does this matter? It increases the cost of capital, so it might dampen investment and eventually growth, which will hurt the UK especially hard as there has been a lack of investment and low productivity (see below). It will also keep share prices low (if your savings account pays interest, you might not want to buy shares). This is a global phenomenon—even the Bank of Japan is going to tighten its monetary policy https://www.bloomberg.com/news/arti...r-sinks-after-boj-surprises-with-policy-tweak, so let’s see next month how this has developed, both on a global and a national level.
Energy Prices Falling
While retail energy prices might not have fallen yet (partly because they did not go up as much as prices on world markets, and utilities usually hedge against price increases), we have seen natural gas prices fall by 44%. Spot and forward prices might develop differently, but one of the main drivers of inflation in recent times has fallen significantly, almost to levels before Russia started the war in Ukraine. Oil prices (Brent) have fallen slightly by 0.7% as well. This brings some welcome respite to inflationary pressures.
Share Prices Rebound in January
Share prices have seen decent growth in January (Dow Jones +3.2%, NASDAQ +11.9%—it tends to be more volatile than non-tech indices—FTSE 100 +3.4%, German DAX 40 even +10.2%), but it remains to be seen if this is part of a longer rally https://www.economist.com/finance-a...llying-markets-suffer-from-a-doveish-illusion. Compared to the 2022 performance of falls by as much as 20% or 30%, this is some welcome respite. Should this trend continue, and you have a regular investment plan https://canarywharfian.co.uk/threads/personal-finance-budgeting-and-saving-for-retirement.708/, you might see a decent performance of your portfolio again soon as you kept on buying through a period of low prices (back to a performance trajectory as before).
Bitcoin and Cryptocurrencies Surge
If you are into more adventurous investments, Bitcoin (and also other cryptocurrencies) has gained almost 40% in January, and it seems that its price is somewhat correlated with NASDAQ, so it might not be an investment decoupled from other asset classes after all https://coinmarketcap.com/alexandri...l-Reserve-Enforces-Smaller-Interest-Rate-Hike.
China's Reopening and Its Impact
It remains to be seen what China’s reopening after years of strict Covid lockdown brings https://www.reuters.com/breakingviews/chinas-reopening-generates-mirage-normality-2023-01-27/—in the medium term, commodity prices should rise, and it will go back to its usual growth trajectory, but you could make the argument that the current wave of Covid cases puts a damper on growth in the first quarter. This could also give a boost to companies exporting a lot to China, especially in continental Europe, and lift the eurozone out of a potential recession. Worst-case scenario would be the emergence of a new variant among the hundreds of millions of cases currently being reported.
UK Economy's Poor Outlook
As for the UK, things are not looking good—the IMF forecasts the slowest growth (read: contraction) of any large economy, even slower than Russia https://news.sky.com/story/uk-econo...eloped-world-this-year-imf-forecasts-12799201. It seems that Brexit is finally biting, but Britain is also more dependent on gas than other countries, and there is very little public investment https://news.sky.com/story/why-does-the-uk-fare-so-poorly-in-the-latest-imf-forecast-12799691. Bear in mind that the UK has also seen a lost decade without any productivity growth https://www.cambridge.org/core/jour...nprecedented/287949348D9BBA0223B3EA7E532C4B22. On the positive side, inflation has dropped a bit but is still in the double-digit figures https://www.theguardian.com/business/2023/jan/18/uk-inflation-dips-people-continue-to-feel-pinch, so you can understand the reasoning behind the strikes in the public sector. It means that there has been an income cut in real terms (i.e., after inflation), so to catch up with inflation big increases in pay are needed.