2023 would have to go some way to top 2022 for the unexpected, but that is what we have become accustomed to over the last few years.
Last year saw inflation rising at a rapid rate, central banks act to tame it through raising interest rates and the onset of a cost of living crisis fuelled by the aftermath of the Covid-19 pandemic and the Russian invasion of Ukraine.
Things can only get better, right?
An end to the war in Ukraine does not appear imminent and it looks as though Vladimir Putin’s presidency hangs on the outcome so we should not expect him to concede any time soon. However, the West’s appetite to restock Ukrainian supplies and to tame inflation appears to be as critical a factor so there’s hope that we might see peace talks at some point in 2023.
China’s recent civil unrest and the subsequent decision to relax Covid-19 rules has resulted in the expected outcome. It has freed up some of the supply chain issues that it caused, but simultaneously caused high outbreaks of the Omicron strain, which is putting the Chinese healthcare system under strain and leading to absenteeism in the workplace. Supply chain issues are likely to continue in the coming months and recent Chinese sabre-rattling over Taiwan has prompted companies (especially US firms, like Apple) reliant on Taiwanese manufacturing for parts, to onshore production or move to more countries with better international relations. About 22 percent of all chips and more than 90 percent of the most advanced chips are made in Taiwan.
The US economy, which drives much of the global equity performance, is forecast for modest growth in 2023 but with a recovery mooted for the end of the year and in 2024, investors will be trying to catch that wave. Selling investments now could prove costly if this comes to bear.
Rory McPherson, MFDM’s Chief Investment Officer is optimistic about the US: “The US, being the world’s biggest economy, is the one we should focus on and whilst recession seems more likely than not, it is also likely a shallow one; this is our base case. We foresee low and sluggish global growth this year: much more in keeping with the “Turbulent 20s” rather than the “Roaring 20s” that were much talked about as the covid cash piles were amassed. We’d note that the US consumer (who drives much of US and Global growth) is still spending and has the benefit of having refinanced their mortgages back in 2020 when rates were close to zero.”
Closer to home, a recession is expected to cause the biggest decline in living standards since the 1950s, a housing market correction and further strain on public services. However, inflation numbers are forecast to drop by the end of the year and we can look ahead to a brighter 2024.
The importance of personal insurance products has come into focus in recent years and we expect that to continue – protecting against the possibilities of unemployment and illness in this environment seems essential. According to the ONS, one in eight patients sought private medical insurance in 2022 because they felt the wait for NHS treatment was too long.ii
Recent calls from MPs for people to postpone their retirements to boost the economy might grow louder. Importantly, there has been relatively little meddling in legislation around retirement in recent years, but as the government considers some difficult budgetary choices, it’s realistic to expect the usual suspects (the Triple Lock and higher rate tax relief) to come under scrutiny again and our financial planners are keeping a keen eye on anything that could materially affect retirement plans.
Looking slightly further ahead, the end of 2023 will be important for political parties as they plan for a 2024 election. The usual favourite of pledging to reduce the tax burden will be music to taxpayers’ ears, but as the reaction to Kwasi Kwarteng’s infamous Budget shows, ensuring it can be fully costed and is affordable will be a big challenge. Pledging to grow and create a fairer society, while dealing with determined trade unions and public demands for better public services, and controlling taxation in a higher interest rate environment is a tricky conundrum. May’s local elections will be a good barometer of what the public thinks and how the major parties will plan their manifestos.
2023 is a big year for the UK’s image abroad too after a few years of difficulty. The King’s coronation will be full of pomp and pageantry with the eyes of the world on the UK. It could prove to be a boost for UK tourism and reputation, and with less radical personalities in Number 10 and the Foreign Office, international relations could be repaired, after the antipathy of Brexit.
All in all, 2023 looks set to be a challenging year for financial planners and our clients. However, as we can only ever control what we can control, spending too much time thinking about external factors can be counterproductive. Blocking out the noise and focusing on achieving long-term goals is a strategy that serves us well.
Our email newsletters, Budget Reports and magazines will cover all the main talking points in 2023 and if there’s anything that you believe has the potential to impact your financial planning that you need to discuss with your financial planner, please get in touch straight away.
The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than originally invested.
The contents of this article are for information purposes only and do not constitute individual advice.