The outlook for the year ahead
After a volatile 2022 there is some hope that 2023 may be more financially favourable. Consumer confidence has been more positive and the labour market has remained robust. The re-opening of China following the reversal of Covid restrictions has also been seen as a positive indicator for growth, even in light of the surge in Covid since the end of restrictions last month, and fears surrounding recession have been pushed back, at least for the time being. Additionally, mild winter weather in Europe has seen gas prices drop to levels last seen prior to the start of the Ukraine war and with oil prices also dropping, this has helped push inflation data on a downwards trajectory. Added together, this has helped to support the view of financial markets at the start of the New Year. However, although this could be the start of a trend that can shape the landscape in the year ahead, it could also be a shorter-lived period of respite in the midst of a policy tightening cycle.
Inflation looks like it should continue to be moderate through the course of the year, although remaining well above policy targets according to core prices. However, policymakers may be slow to factor in a less restrictive policy outlook in the absence of a much more material slowing in economic activity and rates may remain in restrictive territory for some time, until inflation is much more clearly under control. With labour markets remaining tight, and ongoing strike action by UK workers, there is anxiety that pressure on wages could continue to be a factor that drives up prices in the quarters to come. It is likely economic growth will continue to slow and both businesses and consumers will need to continue to adjust to higher funding rates and a squeeze in real disposable incomes.
The year ahead is certain to be very changeable and we remain hopeful for positive economic conditions ahead. However, the road to recovery is far from over and it is unlikely that we will see plain sailing and calm conditions for too long.
