Susannah Streeter, senior investment and market analyst, Sarah Coles, senior personal finance analyst and Helen Morrissey, senior pensions analyst at Hargreaves Lansdown crack the crystal ball for 2023.
Inflation set to remain sticky
“Extremely large rate hikes now appear to be in the rearview mirror as data trickling down indicates the pace of price growth is slowing. But while inflation may have peaked, that doesn’t necessarily mean it’s a smooth downward path from here.
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There is still the potential for much pain ahead as stubbornly high prices continue to cause serious headaches for the economy. While a recession will dampen domestic demand, much of the inflationary pressure has been external, and as the Russian offensive in Ukraine continues and energy prices remain unpredictable, it is uncertain how quickly prices will fall.
The Bank of England has forecast inflation to be around 5% by the end of 2023, but as always with forecasts there are no guarantees.”
You pay more tax
“The round of tax increases in the fall statement made for miserable reading, but even before that we faced higher tax bills because the freezing of income tax thresholds means that wage increases will push more people to pay more taxes – and huge numbers of people in higher tax brackets.
These kinds of hidden taxes often slip under the radar, but can have a much bigger impact than a tax increase. The Institute of Fiscal Studies estimates that freezing personal tax thresholds will reduce household income by an average of £1,250 by 2025/26.
In addition, the autumn statement brought bad news for higher income earners as the additional rate threshold was reduced from £150,000 to £125,140. Those who run their own businesses and pay themselves out in dividends, and investors with large portfolios outside of an ISA or pension, also face more dividend tax if the surcharge halves in April.
For those investors, there is also the risk of capital gains tax after the deduction for this was also halved in April. If you add the higher municipal tax and the frozen inheritance tax brackets to that, we are being pushed from all sides for more tax.”
Energy prices remain volatile
“Uncertainty is coming in waves on energy markets as choppy tides of supply and demand push up oil prices but stand in the way of big profits. Less crude oil is expected to be available to buy given the $60 limit on Russian oil, meaning it cannot be shipped on EU or G7 tankers, insurance or lines of credit unless it is below that price limit is.
However, Russia has vowed to get around that by leasing tankers elsewhere, and it seems likely that significant flows will be diverted to friendly countries.
OPEC+ is taking a wait and see approach before making further changes to already lower production targets. It is also unclear how the Covid situation will play out in China. Investors are hoping that strict pandemic policies will be further relaxed.
A quick turnaround for China is unlikely, as the projected increase in infections will be another huge challenge to navigate, and once the economy reopens, demand for oil and gas is expected to pick up again. Gas storage facilities in Europe that were over 90% full are already falling as the cold snap continues, and the shock to energy security may have just been postponed, not averted.”
And Your Electric Bill Will Rise
“Due to the volatility of the wholesale energy price, the Energy Price Guarantee will keep energy prices under control in 2023. However, annual bills for the average user will still rise to £3,000 from April, and we’ll lose universal fixed amount payments at that point too.
It’s still a long way from the horrors we could have expected without the guarantee, and there will also be additional living expenses for people on means tested benefits, retirees and those receiving specific disability benefits, which should help those who will struggle help out. most with higher bills. For middle earners, however, we know that we will get less help with more expensive bills.”
Mortgage rates may fall
“Lower inflation expectations are good news for borrowers, as interest rates are expected to continue to rise early next year, reaching somewhere around 4.5%. assuming nothing unexpected is lurking in the coming months, they are expected to fall back quickly as the recession continues.
These lower-than-expected forecasts are already spilling over into lower fixed-rate mortgages, which are likely to fall even further.”
Savings rates may also drop
“For savers, the news is less positive as those lower interest rate expectations have already secured some of the most competitive fixed rate savings deals, so we are likely to see this easing as we move into 2023.
The good news, however, is that with inflation expected to be around 5% by the end of next year and less than 2% in 2024, there is a chance that the best biennial fixes could still beat inflation.”
A downturn in the housing market is likely
“There will be some major shifts in the mortgage market next year as lending plummets in the face of the cost of living crisis. Affordability is already being affected by the sharply rising cost of borrowing, making people more hesitant to take that next step on the housing ladder.
UK Finance predicts that property transactions will decline by more than a fifth over the course of the year. This will lead to a return to pre-pandemic levels, but with buyers hibernating as the market freezes, home prices are at risk of falling.
There is still hope that relatively high employment and low housing stock can prevent a prolonged downturn. However, now that confidence has taken a hit, buyers will not be rushing back to the market and there is a risk that a deeper dip is looming.
The US housing market is still entering 2023 in correction territory, and with optimism fading away, this could have further ramifications for the economy as a recession caused by falling house prices has historically been shown to be deeper.
In China, too, the house of cards in real estate has not yet fully stabilized, despite recent attempts by authorities to urge banks to be more lax with lending criteria.”
There may be less positive news for jobs
“We have become accustomed to a booming labor market in recent years, so more people have job security and plenty of alternative options. The picture is not expected to change radically overnight, but we’ve seen unemployment rise slightly and job vacancies fall in the latest set of numbers, and once the recession hits, we may see more uncertainty and uncertainty seeping into the job market.”
We will continue to debate the AOW Triple Lock
“The decision to reintroduce the AOW triple lock was greeted with a sigh of relief by pensioners who were expecting a 10.1% increase in their AOW from April. The decision to suspend it last year was seen by many as a first step towards getting rid of it in the long run and the mixed messages leading up to the mini-Budget certainly didn’t help.
The return was announced during the fall statement, but it remains a divisive policy with many believing it is unfair to younger generations and the rising cost of providing the state pension will continue to fuel the debate over the long-term future of the triple lock fuel.
We could see further increases in state pension ages
“The state pension age has risen rapidly in recent years and currently stands at 66 for men and women – with a shift to 67 in 2028. The timetable outlines that the shift to 68 is due in 2046, although the government is open by saying it believes it should happen sooner – by 2039.
The timetable is subject to a state pension review due to be published early in the new year, with the author having to balance managing the eye-watering cost of providing the state pension against the fact that the rapid rise in life expectancy is slowing and that many people just can’t keep working for that long.
Rumors are already circulating that the timetable could be pushed even further forward – perhaps as far as 2033 – a move that would cause dismay among many older workers.”