After a volatile year for the United Kingdom investors because it is possible to be optimistic despite the looming challenges and the contrary winds that the British economy is facing.
According to the Office of Budget Responsibility
According to the Office of Budget Responsibility, the Bank of England and most of the forecasts, the United Kingdom economy will contrast in 2023. Despite the support of the government to families for the payment of energy bills, the cost crisis Of life – with salary rates that increase less than inflation – will be felt, especially for consumers of the lower income bands. Higher interest rates and higher mortgage rates, for those who rinegian low -cost fixed rate agreements stipulated in the era of zero interest rates, will exert further pressure on families’ finances.
There will be fewer real estate transactions – a traditional driving factor of large money movements – and it is likely that the prices of the houses will drop by about ten percent compared to recent peaks. However, this recession will be different from the previous ones. It will probably be superficial and long rather than deep. The labor market remains solid, with many small businesses that struggle to cover vacant places. Large companies have recognized semester and non -annual employees, together with loyalty prizes and shopping vouchers.
They will not go from today to lay off workers who desperately trying to keep, which means that employment should remain high. The budgets of consumers are in a fair form – with the usual sad reserve on the extreme difference between “who has” and “who does not have” – since the forced savings and the reimbursement of the debt during the pandemic make sure that we enter a recession overall Without worrying excesses of debt.
The company budgets are equally reassuring, since companies collected capital where necessary during the pandemic; Therefore, it is unlikely that the company failures due to excessive debt are a characteristic of this recession, unlike that of 1990-92, which took place after the Boom of Lawson on the late 1980s.
The excess of debt this time falls on the government’s budget, as a result of the support plans implemented during the pandemic and now for the bills of energy, the apparently inexhaustible financing needs of the national health system and, more and more, of the costs of the public debt service with the increase in interest rates or as a consequence of the payment of interests related to inflation. Public debt is one of the reasons why the British economy winds are likely to extend. Discounted or reduced tax relief on income, dividends and capital gains in a moment of wage increases led by inflation will push more people to pay higher tax rates than ever.
In addition, this effect will accumulate over time if freezing is maintained as required by the government in the next five years. In the event of a change of government in two years, the incoming Labor government should face the same tax challenges and could stick to the existing plans to deal with them, as happened in 1997 with the expenditure plans of the Chancellor Ken Clarke. Without a doubt, the government would impose even greater tax burden on “those with the wider shoulders”, but there is no room for a generous policy regardless of those who are in power. As a result, the British economy in 2023 will experience a curious government support mix for retirees and to those who use energy, unbalanced towards the less well -off during the next winter.
We will witness an increase in interest rates and mortgages but with a limited increase in unemployment – which is the traditional source of great difficulty during a recession; Finally, we will also observe modest drops in houses prices and a certain continuous growth of wages albeit with an increase in taxation. Inflation will determine the increase in interest rates, as well as salaries and costs of interest on government debt. Without a further strengthening of energy prices (can we see in 2023 a negotiated end of the conflict in Ukraine?), The inflation will drop in 2023.
Given the tax strictness outlined by the Government, the Bank of England will make its best To slowly raise interest rates. It will grasp the drops in inflation to moderate its increases and will stop even if inflation is still significantly higher than its 2%objective, not wanting to unduly add winds contrary to the economy. Monitor the evolution of economic data in a measured way will be his password. Both bonds and equity markets have undergone simultaneous losses almost unprecedented in 2022.
This is the necessary dissolution of a bubble induced by maintaining interest rates to zero for too long, together with monetary expansion through quantitative Easing and government support forms to businesses and citizens during the pandemic. The late move of the US Federal Reserve to restore a positive interest rate, although to a lesser extent in real terms, made excessive assessments drop both of the obligations and actions.
The good news is that the liquidation was substantial, with ten -year US Treasury securities that went from a minimum in terms of return of 0.5% to about 4%. It is unlikely that increases of another 3% from here; Therefore, most of the assessments of the assessments should be behind us. Another positive news is that in recent years the British stock market has submitted in such a significant way the other equity markets – due to Brexit, of a propensity to value towards unpopular sectors and persistent net sales – which is now on levels of Evaluation from which further substantial drops are improbable.
In this context, British actions appear evaluated in a very interesting way. The least good news is that the same cannot be said for Wall Street, which remains highly appreciated compared to the historical standards despite the extent of the falls of the growth titles with high rating so inflated during the bubble period. A further downgrading to Wall Street seems inevitable, even if animal spirits are anxious to revive on the basis of any “pivot” of the Federal Reserve.
British actions are unlikely to be immune from further discounts to Wall Street, even if our evaluation suggests that there are the foundations for a fairly quick recovery. Investors will examine the effectiveness of their companies in traveling the difficult moments that await them, but after passing the pandemic, the management teams are experts in overcoming the contrary winds of both the demand and the cost of the offer. After a difficult year for investors in 2022, there is a lot of to be constructive for 2023, regardless of current twenty contrary winds.
This article is originally published on .milanofinanza.it