Economic Outlook is Better?
Photo by Nathan Dumlao on Unsplash
Britain’s economic outlook is a bit rosier, at least, that is the verdict of the International Monetary Fund (IMF), who on May 23rd upgraded its forecast for the country. Instead of falling into a recession this year, as predicted in April, the IMF now believes Britain will eke out some economic growth. The IMF attributed the improvement to a ‘trifecta’ of falling wholesale energy prices, improved financial stability and warmer relations with the EU, exemplified by Rishi Sunak’s recent deal to reduce trade frictions in Northern Ireland. As a result, the IMF reckons Britain no longer looks like the sick man of Europe. Their forecast of 0.4% of growth for 2023 is hardly the stuff of champagne and cartwheels, but it is still better than the slight contraction it predicts for Germany. They also think Britain will do better than France and Italy over the next few years. Those politicians who pointed out the fallibility of the IMF when it was predicting a recession are now, not surprisingly, hailing the technocrats’ prophecies as evidence that pessimism about Britain is overdone.
At first glance, inflation figures published on May 24th appear to be similarly encouraging for the government. For the first time since the Russian invasion of Ukraine, the pace of price growth fell into single digits in April, with the consumer-price index rising 8.7% in the 12 months previously. That is a big fall compared with the 10.1% rate in March.
The drop was less than economic forecasters had expected. Economists working at banks and other financial institutions had predicted the rate of inflation would drop even more steeply, to 8.2%. Higher food prices, increasing by 19% compared with April 2022, were partly responsible. There was also a significant jump in the price of communication with many mobile-phone and broadband suppliers up rating their prices for annual contracts in April at rates above the inflation rate.
Most concerning for the Bank of England’s (BoE), Core Inflation, which strips out food and energy to give a less volatile picture of underlying inflationary pressure, rose to 6.8% in April, up from 6.2% in March. This means the core-inflation rate is at its highest level since 1992. A similar rise occurred in the rate of services inflation, a decent indicator of the domestically generated inflation that the bank has the greatest power to affect.
With all this data and news, many managers promptly raised their bets on an increase in interest rates when the Bank’s holds its next meeting in June. Markets also predicted the main policy rate will peak at 5.25% in November, compared with a peak of 4.5% before the latest data were released. The yield on government borrowing jumped to levels just below those seen in the chaotic aftermath of the disastrous mini-budget in September.
The combination of better-than-expected growth prospects and worse-than-forecast inflation does make the Bank’s decisions much easier. The economy both needs and can cope with higher interest rates but rising mortgage costs and stubbornly high inflation mean it will be a while before we can share the IMF’s sunnier view of the country’s prospects.
Our investment teams are busy behind the scenes both before and after these announcements. After a period of negative growth and pessimism, the market levelled out lately and there are some signs we can expect some growth in the remainder of the year. It remains frustrating after the poor year in 2022, we still have not kicked on in economic terms. With mortgage costs set to rise later in the summer, perhaps it’s a good time to get your finances reviewed. Speak to your Prosperis adviser and arrange a meeting now, do not delay!
If you would like to speak to an adviser, please give us a call on 01423 23640 or email advice@prosperis.co.uk.