Caution and retrenchment to set the agenda for 2023


Households, businesses and governments will seek to batten down the hatches this year, but there are still reasons to be optimistic in 2023.

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Image by Geoff Henson

By Josh Cole

By all accounts, 2022 was a tumultuous year. Record levels of inflation, soaring energy prices caused by Russia’s illegal invasion and of Ukraine and aggressive interest rate rises by central banks across the world were but some of the key events affecting personal finances, national and global economies. More definitively, 2022 has shown that old assumptions can no longer be taken for granted and that the global economy has decisively entered a new phase. So, given this backdrop, what does 2023 have in store for us? Well, if 2022 is anything to go by, making cast-iron predictions is a foolish enterprise. However, as we move into a period marked by instability, it seems likely that caution and retrenchment are going to dominate the agenda.

For almost everybody in the UK, sustained levels of high inflation squeezed household incomes in 2022. Hitting a peak of 11 percent last year, it looks likely that inflation will slowly start to recede in 2023 with economists predicting an average inflation rate of 5 percent by October this year. Nonetheless, 2023 will still be an extraordinarily tough year. Over the past decade, the stagnation of real wages, meaning annual salaries adjusted by inflation, meant that last year’s surge in inflation, which was concentrated in unavoidable costs like energy and essentials such as food, was particularly difficult for many households to deal with. Recognising that costs will still remain high throughout 2023, even with a slowdown in inflation, some households spent 2022 saving better off households saved throughout the year to ready themselves. Indeed a record £11.3 billion was deposited into savings accounts in October 2022 alone. But for the poorest in our society, who have unavoidable costs that take up a disproportionate amount of their income and consequently struggle to save, the prospect of still climbing prices and decreased spending power could make 2023 particularly difficult.

This pressure on household income will further increase in 2023. Many people will feel this acutely in rising mortgage costs, unfortunately triggered by the only tools central banks have to combat inflation. To try and curb inflation, central banks such as the US Federal Reserve, European Central Bank and the Bank of England reversed a decade-long policy of near rock bottom interest rate levels and embarked on a policy of sustained rises. Indeed in Britain, the current interest rate sits at 3.5 percent, up from just 0.1 percent at the end of 2021. Raising interest rates makes it more expensive to take on loans, with the hope that it cools down economic activity and therefore the rate of inflation. Included in this is, of course, mortgages. Predictions that the recent rate rises will add an extra £300 to average monthly mortgage cost in 2023 will put further pressure on UK households as 1.8 million mortgage holders will have to renew their policies this year.

One potential ray of brightness for UK households this year could, however, be found in energy prices. After reaching a staggering high of 640p per therm in August last year, as Europe scrambled to find new gas supplies as it finally unhooked itself from Russian dependency. Energy prices have now stabilised at 153p per therm as alternative American and Arab sources come onstream and a milder than expected winter didn’t deplete European gas storage levels as much as anticipated. Nonetheless, this is all relative. The average annual energy price bill for UK households in July is predicted to be £2,800. Whilst this is lower than the government’s energy price cap of £3,000, as set by new Chancellor Jeremy Hunt in the November Autumn Statement, it is still over twice what the energy price cap was in summer 2021. At the same time, throughout 2023, government handouts to households will move away from a blanket policy towards one that is tailored to providing support for those either on Universal Credit or low income pensioners. Whilst this is better for the, somewhat, stretched public purse and fairer towards the most needy in society, it suggests that the average household’s income will be under sustained pressure in 2023.

At the national level, the picture is likewise bleak. As households seek to curb expenditure, the increased cost of debt deters investment and UK productivity rates continue to stagnate with the number of economically inactive people rising sharply, caused by around half a million 50-64 year olds taking early retirement and higher rates of long term physical and mental illness, the UK economy looks set to be in recession for most of 2023. In spite of all of this negativity, what will make 2023 different to previous years of difficulty is how remarkably tight the labour market continues to be. At the start of the year, there are officially more job vacancies than there are unemployed people. Caused in part due to the alarming number of people leaving the workforce earlier than they would have done before the pandemic and long-running skill shortages within the UK labour market, this means that those in work should be able to keep spending and more easily change jobs than they would have been able to do in the 2008 recessions which was accompanied by a significant uptick in unemployment. This is good for the economy and for people’s peace of mind, but many of the factors that will affect the UK in 2023 will continue to be shaped by global factors that are out of our control.

It's important to recognise that all developed economies have been battling inflation in 2022, caused by the legacy of the pandemic. The initial surge in demand for commodities and goods, after Covid receded, massively outstripped supply, and was worsened by the irregularities of China’s “Zero Covid” policy which restricted the regular and free flow of manufactured goods from East to West. In 2023 however, with China’s Communist Party lifting all restrictions in the face of popular pressure, the potential that China’s recovery could further intensify demand for goods, natural resources and energy may intensify competition in 2023 and scupper hopes for a dramatic slackening in the pace of inflation. The particular troubles caused by the massive disruption to the supply of energy and physical commodities, such as metals, resulting from Russia’s invasion is another particular pressure point that is going to cause headaches for policymakers across the UK, Europe and further afield. The conflict shows no sign of relenting in 2023, and whilst Russia seeks to divert its trade towards Asia, Europe will have to get used to new energy relationships with the Middle East and America. Whilst there’s significant grounds to hope that in the medium to long term, this new reality will encourage Europe to seize the potential for energy independence that only green and renewable power offers, instability and uncertainty seem set to dominate 2023.

This theme of uncertainty at the household, national and international level seems almost certain to characterise the approach of many businesses to 2023. In contrast to the tight labour market in the UK national economy, at the global level, the largest companies are seeking to row back from overhiring during the bullish post-Covid recovery period. Concentrated particularly in the tech industry, companies are seeking to reduce their workforces to mitigate rising labour costs and a slowdown in economic activity. Globally, the investment bank Goldman Sachs announced a planned cull of 4,000 employees (roughly 8 percent of their workforce), Amazon this year admitted to overhiring post-pandemic and has promised to cut 18,000 jobs globally and software firm Salesforce admitted the need to rein in costs and has promised to cut 10 percent of their workforce. These cuts to global workforces of the very largest companies are representative of a general theme of retrenchment that looks set to overturn the character of the past decade. Whereas the 2010s was dominated by the seemingly inexorable rise in the value of tech companies, with the likes of Apple, Meta (the owner of Facebook) and Tesla all surging past the $1 trillion mark, the current decade will be anything but.

Reliant on very lean and global supply chains, with a particular vulnerability over China for both sales and manufacturing, the difficulties of the past few years has led investors to become increasingly sceptical. This has led to a radical readjustment in why and where value is being sought in 2023. Sky-high valuations have been seen to obscure the real value of these companies, for example Tesla’s revenue in 2021 was $57 billion but was valued at over a $1 trillion, and are now greeted with scepticism. Therefore, it’s no surprise that on the London FTSE 100, an index of the largest companies on the London Stock Exchange, the firm that increased its value the most was BAE Systems, the defence contractor who benefitted from investors identifying its tangible value in an increasingly insecure world.

In a further assault on the tech world, 2023 will witness government regulators across Europe and the US start to flex their muscles as the era of laissez faire management in the online space comes to a close. Fresh off the back of the EU fining Meta €400 million last year, the bloc has publicised its willingness to take on Elon Musk’s perceived freewheeling approach to Twitter and the UK regulator OFCOM starts to implement the controversial Online Safety Bill, empowered to fine social media companies up to 10 percent of global revenue if they fail to comply. Finally, in the spirit of scepticism, one potential ray of sunshine in 2023 could be the disappearance of cryptocurrencies as a significant form of alternative investments. With currencies like Bitcoin promising people that they could get rich quick on an asset class that lacked any tangible value or regulatory oversight, the deep winter in which the crypto has found itself in 2022 seems like a positive outcome for the spirit of caution and restraint that the world has been forced to embrace. The intensification of the legal battles in 2023 over the staggering fraud case of crypto “entrepreneur” Sam Bankman-Fried’s FTX Exchange this year could hopefully trigger a much needed evaluation of the dangers and relevancy of this sector to global finance.

In sum, 2023 will be a difficult year for many across the world and it seems fair to argue that caution and retrenchment will characterise how households, governments and corporations respond to the challenging headwinds facing them this year. Nonetheless, there are very tentative reasons to be optimistic that 2023 might not be as bad as has been predicted and indeed might provide some opportunities to rethink long-held assumptions. But, if 2022 is anything to go by, there’s no telling what could happen.