Back in 1977 UK inflation rates of 15.85% were around.
Jump ahead some 45 years and we’re living through another economic downturn, exacerbated by war in Europe and the after-effects of a global pandemic. So, what does the economy in 2023 have in store for investors? Well, we’re unlikely to see big changes overnight, but there are plenty of signs that the end is in sight, as we’ll see below.
The natural order of things
We can’t deny it – 2022 has been a tough year for most of us. Rises in inflation and interest rates have resulted in a less-than-prosperous world over the past 12 months, and for many countries, the worst may be yet to come.
However, we’ve seen some signs of stabilisation towards the end of the year, and together with the lessons we can learn from history, the economy in 2023 – at least by the year’s end – may look very different from our present situation.
At times such as these, it’s worth reminding ourselves that – like everything else in life – recessions have a natural end-point. In looking for signs that contribute to recovery, we can look forward with cautious optimise, as opposed to pure pessimism – let’s leave that to the world’s press!
Has UK inflation peaked?
In a word, ‘potentially’. After a UK consumer price inflation of 11.1% in October 2022, this dropped slightly to an annual rate of 10.7% in November. All the signs suggest a levelling off across the month of December, and there are some positive signs regarding petrol and diesel prices.
Such shifts have been mirrored worldwide, with the peak of inflation in the United States some months ago. It’s clear that we’re not out of the woods just yet – and indeed, it may take most of the year before proper recovery occurs – but these tentative steps are the first sign that the economy is in a state of fix.
Many of the hike rakes are now behind us
Market indicators suggest that the worst rate rises are behind us. Although it may take the majority of 2023 to stabilise, we’re unlikely to experience the price hikes experienced in 2022. December 2022 saw the banks raise interest rates by a further 0.5% to 3.5%.
It’ll be no surprise if this is raised further at the start of 2023, but we’re unlikely to see the astronomical rates experienced in the 1970s and 1980s – don’t forget, this period rarely saw figures drop below double-digits. On current evidence, it’s not unreasonable to expect rate cuts from the central banking powers by the end of 2023, regardless of further rises at the beginning of the year.
Low-risk investments could offer higher returns
Low-risk investments such as bonds have offered little interest across the past decade, making them the preserve of low-risk investors, investing little for little return. After the drops experienced in 2022, many low-risk investments are now offering higher returns, suggesting the year may well become one of stabilisation.
China returns to the global market
China’s zero-Covid policy in 2022 stopped the country’s economic growth in its tracks. This, of course, had a trickle-down effect on economies worldwide, given China’s place as the world’s second-largest economic force.
However, following three years of border closures, China has re-evaluated its policy and announced itself ‘open to business.’ From January 8th, the number of flights into the country is set to increase, and the former strict Covid quarantine procedures for visitors will be significantly scaled down. China’s return to the market can assist the global economy in 2023 and is another sign that we’re en route to more prosperous times.
Innovation is going nowhere
Despite the economic hardships experienced across 2022, it’s still been a positive year for innovative breakthroughs. These are significant indicators that we’re living in a world with one eye on growth and improvements, despite hikes in inflation and interest rates.
Although businesses may be experiencing a necessary period of austerity, 2022 has seen the introduction of a fusion reactor with the potential to generate clean, affordable energy for the world’s population. We’ve also seen the creation of a potentially viable vaccine for malaria, an antibody treatment that has seen cancer vanish during patient trials, and a carbon-removal factory in Iceland. Such breakthroughs as these could have significant impacts on the environment as well as the health of the global population.
Current economic hardships are undeniable, but following a rather turbulent 2021 and 2022, there are genuine signs that the next 12 months could throw up some positive surprises. For investors, it’s still a time for caution, but tightening the purse strings and going into hibernation is no substitute for careful, informed decision-making.