17 February 2023

The latest Bank of England inflation data provides some respite for the beleaguered UK economy. The annual rate of consumer price inflation may still be 10.1%, but it represented a five-month low and gave hope that inflation might be peaking. It comes on the heels of better GDP data for the UK, with the economy narrowly avoiding a recession in the fourth quarter of 2022. 


Taken together, these factors suggest a better time for the UK economy. However, it comes with some major caveats. The IMF gave a bleak assessment of the UK economy’s prospects for the year ahead. The organisation identified three significant structural problems with the UK economy likely to drag it below its peers in 2023: its exposure to natural gas prices, its problematic labour markets, and its sharp monetary tightening. 

These three factors are inter-related and each reinforces the economy’s weakness. The exposure to gas prices pushes up inflationary pressures, which necessitates higher interest rates. Labour market problems are creating wage pressures for companies, contributing both to rising costs for companies and to strikes in the public sector. At the margin, they may also be contributing to lower investment in the UK economy. 

As such, while there are shorter-term fixes that may tip the UK economy out of recession such as falling gas prices, lower inflation or a better deal with the European Union, it remains a world away from generating robust growth. The IMF predicts it will be the only G7 economy to decline in the year ahead, and it is the only country that remains below its pre-pandemic size. 

As UK fund managers are fond of reminding us, the fate of the UK economy has little to do with the fate of the international companies listed on the UK stock market. However, it is a greater consideration for smaller companies. It would be a natural time to reinvest in smaller companies, which had a tough year in 2022, but the ongoing weakness of the domestic economy should give investors pause for thought. 

The UK badly needs an economic reboot, but with little political consensus on the measures needed, it is difficult to see this happening in the short-term. In the meantime, corporate UK will continue to muddle through and good companies will continue to make the best of a bad situation. The UK market’s cheapness is a selling point, but sentiment needs to improve for a longer-term revival. 


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This article was sourced from Adviser-Hub.co.uk.

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