Market Update – December 2022

The 2022 investment environment has been dominated by surging inflation, tightening monetary policy and faltering economic growth, against a backdrop of geopolitical uncertainty and energy insecurity.

It has been a torrid year for stock markets. In the US, the S&P500 has dipped by over 20% year to date, while the technology-focused Nasdaq Composite Index has lost over 33%. In Europe, Germany’s DAX Index has lost over 13% and France’s CAC 40 is down over 10%. The FTSE100 has fared better, down just over 2%, in part due to its weighting towards oil and gas companies, but the FTSE250, considered a more accurate reflection of the UK economy as a whole, is down over 22%.

The UK is already believed to be in a recession that could last until the middle of 2024. The UK economy contracted by 0.2% between July and September, and is expected to shrink again in the fourth quarter. The Organisation for Economic Co-operation & Development (OECD) expects the UK economy to contract by 0.4% next year, making it one of the worst performers among the major economies.

To add to the difficulties for the UK economy, the OBR (Office for Budget Responsibility) recently predicted that UK households face their largest decline in living standards since records began in 1956. Household incomes (adjusted for inflation) are forecast to fall by 7.1% and are not expected to recover to pre-pandemic levels for at least six years.

The energy price cap does seem to have helped to prevent UK inflation soaring even higher. The annualised rate of inflation (CPI) increased from 10.1% in September to 11.1% in October, but then fell back to 10.7% in November, raising hopes that it may have peaked. However, food price inflation continued to increase, rising from 11.6% in October to a record 12.4% in November, driven by higher prices for energy, animal feed and transport.

The Bank of England (BoE) implemented its ninth consecutive interest rate increase in December, increasing the base rate by 0.5% to 3.5%. In the minutes from the meeting, the Bank’s Monetary Policy Committee (MPC) warned of “considerable uncertainties around the outlook”, maintaining that it would “respond forcefully” if inflationary pressures appear more persistent.

Interest rates in the US also increased by 0.5% in December, with the Federal Reserve (Fed) raising its key rate to a target range of 4.25% to 4.5%. This followed four previous increases of 0.75%. Although inflation in the US has eased, with CPI falling from 7.7% in October to 7.1% in November, Fed Chair Jerome Powell warned: “50 basis points is still a historically large increase, and we still have some ways to go”.

Fed officials expect the US economy to expand by 0.5% in 2023, while inflation is forecast to remain above its 2% target until 2026. Expectations for US economic growth in 2023 were downgraded from 1.2% to just 0.5%, and the unemployment rate is forecast to rise to 4.6%. Chair Powell said: “The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done”.

Although China’s economy grew by 3.9% during the third quarter, growing dissatisfaction over the Chinese government’s controversial zero-Covid policy triggered protests in some cities and soured investor sentiment towards the country’s economy and wider global prospects. Meanwhile, Japan’s economy contracted by 1.2% year on year during the third quarter as consumer spending was curbed by rising prices.

Closer to home, the Northern Ireland economy is thought to have narrowly avoided entering recession in the third quarter, after shrinking by 0.1% in the second quarter. Official figures will be published by the Northern Ireland Statistics and Research Agency (NISRA) in January, but growth in the services sector is expected to have compensated for a steep fall in retail sales.

While the EU as a whole is expected to enter recession over the final quarter of 2022 and first quarter of 2023, Ireland’s growth for 2022 is forecast to be a healthy 7.9%, helped by a strong post-pandemic rebound earlier in the year. Growth is then expected to slow to 3.2% in 2023 and 3.1% in 2024.

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This article is for information only and should not be construed as advice or a recommendation. You should always seek independent financial advice prior to taking any action.

The value of your investment can go down as well as up and you may not get back as much as you originally invested.

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