It is impossible to write about the current economic situation without first mentioning the humanitarian impact of the conflict in Ukraine. Tens of thousands of people have been killed or injured, including a huge number of civilians. Some 5 million refugees have already fled to other countries, with a further 7 million people thought to have been internally displaced. And as things stand, the conflict has no end point in sight.
The Ukraine conflict is just one factor in what has been a pretty dismal year to date for pensions and investments in general. US stock markets have seen their worst first half of a year since 1970, as concerns grow over how Central Bank action to curb inflation will affect economic growth. In the first 6 months of 2022, the benchmark S&P 500 index fell by 20.6%, while the technology-focused Nasdaq Composite index fell by 29.4%. This is officially classed as a “bear market”, where share prices fall by over 20% from a recent high (with a “bull market” being the reverse).
It is important to recognise that both “bear” and “bull” markets are commonplace. The most recent of the previous bear markets was also the most rapid, as share prices fell in early 2020 in response to the Covid pandemic.
The only industry sector in the S&P500 not to suffer falls in the first half of 2022 was the energy sector, which posted gains of 29%. Losses in other sectors ranged from 2% for utilities to 33% for the consumer discretionary sector.
In the UK, the FTSE100 has fared better, with a fall of 4.6% in the first 6 months of 2022. 70% of earnings of companies listed on the FTSE100 (the largest 100 companies by market capitalisation) is derived outside the UK, meaning a weakened sterling will normally provide a boost to the index. However, the FTSE250 (the next 250 largest companies), which is focused more on the domestic market and is therefore considered the better barometer for the UK economy, has fallen by 21.9%.
The IMF (International Monetary Fund) has cut its forecast for UK growth this year from 4.7% to 3.7% and from 2.3% to 1.2% for 2023, the lowest figure for any major advanced economy. UK inflation (CPI – the Consumer Prices Index) hit 9.1% in May, and is predicted to reach double digits by the Autumn.
Preliminary figures for Eurozone inflation showed a rate of 8.6% in June. The ECB (European Central Bank) has announced its intention to increase interest rates to -0.25% (from the current -0.5%) in July. The ECB has had negative rates since 2014 but has highlighted that it may bring in further increases later in the year, taking rates back to at least zero. The ECB also cut its growth forecast for the Eurozone from 3.7% to 2.8% for 2022, and from 2.8% to 2.1% for 2023.
There are some signs of light at the end of the tunnel. Global equity and bond valuations have already to a certain extent “priced in” the gloomy predictions of further increases to inflation, a strong likelihood of recession and a continued tightening of monetary policy. Corporate earnings and balance sheets remain relatively healthy, with leeway to withstand further price increases and a deterioration in the wider economy. And unemployment figures remain low, although in the case of the UK, labour shortages are contributing to the poor economic outlook.
Closer to home, the Northern Ireland economy continued to grow in the first quarter of 2022. Economic output grew by 0.4% from the previous quarter and by 7.8% from the previous year, according to the NI Statistics and Research Agency (NISRA), with economic output now having almost recovered to the peak of 2007.
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The value of your investment can go down as well as up and you may not get back as much as you originally invested.