At the onset of the year, market concerns were predominantly around the persistent inflation that was anticipated to be a primary issue throughout 2022. The economists’ forecasts for UK inflation were for a peak of around 5% in quarter 1, with a reduction to around 3% by the end of the year.
However, the invasion of Ukraine changed the outlook overnight as we are all aware.
Pressure on expenditure
The revised forecast is that CPI is to reach 8% before June and unlikely to drop below 3% for a further 12 months which will put pressure on expenditure. That said, both the UK and the US are best positioned when compared to other countries to ride out the impact of both energy and food price rises. It is expected that the Bank of England will continue with small interest rate increases in an attempt to temper inflation, although not anticipated to breach the 3% mark.
The labour market being squeezed with unemployment very low and recruitment difficulties resulting in an exponential increase in starting salaries being demanded. An additional factor to the low employment pool is that EU migrants that returned home during COVID are not returning in the same numbers.
The equity market, year to date, has had a torrid time with only UK equities managing to remain on par. Our European counterparts, as frequently explained in the media, has been most effected by the Russian shock due to the energy supply reliance. The rise in the oil price remains elevated although it has fallen back slightly from the peak. We are all aware that Russia is a big exporter of energy, in fact 49% of total goods exported from Russia in 2021 were energy related (oil and gas). Conversely, 38% of EU’s imports of gas are form Russia and 23% from oil. Commodities such as industrial metals and agriculture (which includes wheat and soy etc) have also spiked from the lows of 2020. GDP growth forecasts for 2022 for most economies, except Germany and Japan, are lower than last year, which is expected after the levels of growth we’ve seen in 2021.
Chinese equities have suffered the most over the last 3 months due to the strict COVID policy lockdowns with anticipations that the same maybe seen in other regions should an outbreak be identified. China’s economic growth target of 5% may not be attained. The Chinese government is expected to step in with stimulus to help the growth.
In summary, there are clearly a lot of uncertainties with inflation proving to remain at elevated levels and the interest rate rise cycle underway in the UK and US. However, the UK is generally in good shape and there are signs from the labour market that we may be able to weather the price rises and interest rate rises, at least for a little while, therefore speculation is that economists don’t think a recession is imminent, though depending on whether central banks make policy errors, or we see other external unexpected shocks, it would be naïve to rule it out completely.