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Must do better! - Market Update Spring 2023

Must do better!

Market Update Spring 2023

Normally this section – which we traditionally call Market Update – is devoted to reflections on the last quarter in the investment markets and some insights as to what might lie ahead. Always remembering of course the old saying that “the only function of economic forecasting is to make astrology look respectable”.

But not this time. I shall allocate a few lines to my traditional content but devote the rest of the piece to what I consider to be the “ elephant in the room” when it comes to the UK economy. Why are most of the people in the UK getting poorer?

As suggested in my last article markets started 2023 strongly, with global equities having their second-best January this century. But this optimistic tone was followed by a more cautious one in February as Central Banks continued to wrestle with the problem of persistent inflation. To add to this we have the “unintended consequence “ of certain banks ( fortunately mainly regional US rather than global ) being unable to deal with the new interest rate environment. There is fortunately little to suggest that we are on the cusp of a banking crisis.

The main factor remains the inflation / higher interest cycle that we are in. The markets seem to have factored in interest rate reductions which the Central Banks appear unlikely to deliver. This points to a choppy environment for equities until the cycle finally turns and we reach the “immaculate disinflation” outcome the markets crave. Which may be a way off yet. Caution continues to be the watchword.

Now to switch to the main topic of this article. Recently the Resolution Foundation reported that earnings in the UK have fallen 7% since a year ago and predicts that it will take four to five years to recover to the levels of January 2022. If you think this is bad the scene through the rear-view mirror is horrifying. The British economy is in a generation-long trough a slow-burning economic catastrophe. Real household disposable income per capita has barely increased for 15 years.

This is not normal. Since 1948, this measure of spending power has reliably increased in the UK, doubling every 30 years. It was twice as high in 1978 as in 1948 and the same growth occurred in the period up to 2008. Today it is back at those levels. The Resolution Foundation have calculated that had wages continued to grow as they were before the financial crash of 2008, the average worker would make £11,000 more per year than they do now. Taking rising prices into account. It is worth lingering on this point as it is extraordinary. Had the pre-crisis trend continued, the typical Brit would be 40% richer. Instead, no progress has been made at all.

Go back and look for historical precedents for this and you will not find much. If we examine the growth in labour productivity (defined as the total output of the UK economy divided by the total number of hours worked; labour productivity is closely connected to material standards of living) the only worse run of performance was from 1760 to 1800. In fact, nowhere in the last 260 years of data is a sharper shortfall from a previous trend recorded. The reasons as to why this has happened I will leave to another day, but for now, it is worth looking at the symptoms. Is life in the UK really as bad as the apocalyptic numbers suggest? Perhaps so, there is widespread worry about the cost of living, strikes everywhere and the utter meltdown of the emergency healthcare system.

There are subtler indicators of problems. In an ideal world, Governments offer their citizens low taxes, excellent public services, and falling national debt. Of course in the real world, you can’t have it all, but we can’t have any of it. We have rising taxes, more than 37% of national income. Yet this is doing nothing for our public services. In addition, low growth puts pressure on public sector wage settlements as the “pie” is not growing. You would hope that with high taxes and spending constraints that national debt would be low and falling. No debt is high, the deficit is a permanent fixture, and interest payments on public debt have risen to levels not seen for 40 years. Many people in the UK struggle to pay for the basics, many cannot save any money and perhaps up to 10% of the population are unable to eat when hungry at certain times of the month.

This is not supposed to happen in one of the world’s richest countries.

But then the UK is no longer in that club, median incomes in the UK are well below such places as Norway, Switzerland, and the US and well below the average for developed countries. Incomes for the 10th percentile, the technically “poor”, are lower in the UK than in Slovenia.

If all this was happening in a deep recession then we could have hope that ”one day” the business cycle will turn and the problems would disappear. But we are not in a deep recession – the UK economy has the “peddle to the metal” but is barely able to gain speed. The only area in which the UK (nearly) tops the league table is in the area of inequality of household incomes, where we come a close second to the US!

I don’t believe that the situation is hopeless, so next time we will look at some possible solutions to the UK’s economic problem as well as looking at a possible way to predict market movements.

Financial Adviser Financial Adviser Bristol Market Update



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