UK growth forecasts upgraded

Revised projections released last month by both the Bank of England (BoE) and International Monetary Fund (IMF) suggest the UK economy is now set to avoid recession this year.

The BoE’s latest forecast predicts the economy will grow by 0.25% across the whole of 2023, a significant upgrade from February’s prediction of a 0.5% contraction. This improved outlook reflects a number of factors, including stronger than anticipated global growth, lower energy prices and the fiscal support announced by the Chancellor in his Spring Budget.

Updated IMF figures also show the UK is now unlikely to enter recession, with the international soothsayer predicting a growth rate of 0.4% for 2023; in comparison, its previous forecast had suggested the economy would contract by 0.3% over the course of this year. The IMF said growth would be helped by ‘resilient demand ‘as well as falling energy prices and praised the UK authorities for taking ‘decisive and responsible steps in recent months.’

The latest gross domestic product (GDP) figures published by the Office for National Statistics (ONS), however, highlight how fragile the recovery remains with growth still sluggish. Although GDP across the first three months of 2023 did edge up by 0.1%, a similar tepid pace as achieved during the final quarter of last year, monthly data revealed an unexpectedly sharp drop in output during March, with GDP actually declining by 0.3% during the month.

Recently released data from the closely watched S&P Global/CIPS UK Purchasing Managers’ Index (PMI), though, does suggest growth has picked up in the second quarter. May’s preliminary headline reading came in at 53.9, lower than April’s one-year high of 54.9, but comfortably above the 50 threshold that denotes growth in private sector output. Indeed, S&P Global noted that their PMI readings were consistent with ‘GDP rising 0.4% in the second quarter.’

Interest rates rise again

**Last month, the BoE announced another hike in its benchmark interest rate and insisted it will ‘stay the course’ in its battle to bring down inflation.**

Following its latest meeting, which concluded on 10 May, the BoE’s nine-member Monetary Policy Committee (MPC) voted by a 7-2 majority to raise Bank Rate by a further 0.25 percentage points. This was the 12th consecutive increase, taking rates to 4.5%, their highest level in almost 15 years.

Commenting after announcing the decision, BoE Governor Andrew Bailey made it clear that the Bank’s next moves would depend on the trajectory of forthcoming data. However, Mr Bailey did stress that, “We have to stay the course to make sure inflation falls all the way back to the 2% target.”

The minutes to the meeting also warned that the Bank now believes inflation will remain higher for a longer period, largely as a result of food price inflation which is ‘likely to fall back more slowly than previously expected.’ Its latest forecast, which was published alongside the rate decision, suggests inflation will fall to 5.1% by the end of this year, significantly higher than its previous forecast of 3.9%.

ONS data published two weeks after the MPC’s announcement confirmed that the headline rate of inflation remains stubbornly high. While it did fall from 10.1% in March to 8.7% in April, as the extreme energy price hikes seen a year ago dropped out of the calculations, the figure was much higher than the consensus forecast in a Reuters poll of economists which had predicted a rate of 8.2%.

April’s inflation data surprise has undoubtedly increased the likelihood of further rate hikes in the coming months. The next decision is due to be announced on 22 June with analysts now typically expecting another 0.25 percentage point rise.

Markets (Data compiled by TOMD)

At the end of May, global markets closed the month largely in negative territory, with investors awaiting the outcome of the key vote on the US debt ceiling. In addition, the latest economic data from China, which highlighted a further decline in manufacturing activity, also weighed on sentiment.

In the UK, the FTSE 100 ended the month on 7,446.14, a loss of 5.39%, while the mid cap FTSE 250 closed down 3.62% on 18,722.90 and the FTSE AIM closed May on 782.77, a monthly loss of 5.68%.

In the US, the Dow Jones index closed the month down 3.49% on 32,908.27, while the NASDAQ closed the month up 5.80% on 12,935.28. On the continent, the Euro Stoxx 50 closed May on 4,218.04, a loss of 3.24%. In Japan, the Nikkei 225 closed the month up 7.04%, on 30,887.88. The index recently reached historic highs in May, with market sentiment buoyed by the potential of the semiconductor and AI markets.

On the foreign exchanges, the euro closed the month at €1.16 against sterling. The US dollar closed at $1.23 against sterling and at $1.06 against the euro.

Brent crude closed the month trading at around $73 a barrel, a monthly loss of 8.60%. At month end, traders awaited news on progress of the US debt bill, digested the weak Chinese manufacturing data, and considered how the weakening growth could impact crude demand. Gold closed the month trading at $1,964.40 a troy ounce, a small monthly loss of 0.92%.

Index Value (31/05/23) Movement since 28/04/23

FTSE 100 7,446.14 -5.39%

FTSE 250 18,722.90 -3.62%

FTSE AIM 782.77 -5.68%

Euro Stoxx 50 4,218.04 -3.24%

NASDAQ Composite 12,935.28 +5.80%

Dow Jones 32,908.27 -3.49%

Nikkei 225 30,887.88 +7.04%

More optimistic outlook for retailers

Official retail sales statistics showed a slightly stronger-than-expected increase in sales volumes during April while survey evidence points to modestly rising levels of optimism within the retail sector.

The latest ONS retail sales figures revealed signs of consumer spending resilience, with volumes rising by 0.5% in April following March’s sharp decline when sales were hit by unusually wet weather. Furthermore, across the whole of the February-to-April period, sales volumes grew by 0.8% compared to the previous three months; this represents the largest increase recorded on this measure since August 2021.

Evidence from the recently released CBI Distributive Trades Survey suggests the trading environment does remain challenging with sales volumes dipping in the year to May. Sales are expected to stabilise in June, however, and retailers generally expect to see a modest improvement in their business situation over the coming three months.

Commenting on the survey findings, CBI Principal Economist Martin Sartorius said, “Looking ahead, there are some reasons for retailers to be more optimistic about the outlook. Consumer sentiment has been improving and households’ energy bills are set to decline from July. The resulting boost to incomes should help support retail sales going into the second half of this year.”

Unemployment rate edges higher

The latest batch of labour market statistics suggests a further softening in the jobs market with a rise in the rate of unemployment and another fall in the number of job vacancies.

ONS figures released last month showed that the unemployment rate during Q1 edged up to 3.9%, a 0.1 percentage point increase from the previous three months. This was higher than the median forecast in a Reuters poll of economists which had predicted the rate would hold steady at 3.8%.

In addition, the estimated total number of job vacancies fell by 55,000 during the three months to April, hitting its lowest level since mid-2021. This was the tenth consecutive decline, with ONS saying that companies continued to cite ‘economic pressures’ as a factor in holding back on recruitment.

The labour market update also reported the number of people not working due to long-term sickness at a new record high. Over two and a half million people are now not working due to health issues, with ONS saying the increase has been driven by a rise in mental health conditions among younger age groups, people suffering with back and neck pain, and a rise in post-viral fatigue.

It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. No part of this document may be reproduced in any manner without prior permission.

All details are correct at the time of writing (01 June 2023).

Spring Budget 2023: A budget for growth

Jenny Procter blog budget, economic update

You can download this update here

Chancellor of the Exchequer, Jeremy Hunt, delivered his first Spring Budget on 15 March declaring it was “A Budget for Growth.” The fiscal update included a range of new measures, some of which had been widely trailed prior to Budget day, in order to achieve growth “by removing obstacles that stop businesses investing; by tackling labour shortages that stop them recruiting; by breaking down barriers that stop people working; and by harnessing British ingenuity to make us a science and technology superpower.”

OBR forecasts

The Chancellor began his statement by unveiling the latest economic projections produced by the Office for Budget Responsibility (OBR) which he said showed the UK would meet the Prime Minister’s priorities to “halve inflation, reduce debt and get the economy growing.” In relation to the first priority, Mr Hunt said the latest OBR figures suggest inflation will fall from an average rate of 10.7% in the final quarter of last year to 2.9% by the end of 2023. This sharp decline is partly due to some of the Chancellor’s Budget measures, including the three-month extension to the household Energy Price Guarantee (EPG), which the government had confirmed earlier in the day.

Mr Hunt also said the OBR forecast suggests the UK economy will now avoid a technical recession this year (defined as two consecutive quarters of economic decline) and then expand in each of the remaining years of the five-year forecast period. According to the updated figures, the economy is expected to shrink by 0.2% this year, a significant upgrade from last autumn’s forecast of a 1.4% contraction, with growth then predicted to hit 1.8% in 2024 and 2.5% in 2025, before easing back towards its medium-term potential growth rate of 1.75% by 2028.

The Chancellor’s growth strategy focuses on the four pillars ‘Everywhere, Enterprise, Employment and Education,’ as previously outlined in his Bloomberg speech in January.

Everywhere

Mr Hunt spoke about the government’s plans for ‘Levelling Up,’ including the launch of 12 new Investment Zones. Across these “12 potential Canary Wharfs,” £80m of support per zone will be available for skills, infrastructure and tax reliefs. Mr Hunt also mentioned specific projects selected for local investment, including:

£200m for local regeneration projects and £400m for new Levelling Up Partnerships across England
£8.8bn over the next five-year funding period for the City Region Sustainable Transport Settlements
Up to £8.6m for the Edinburgh Festivals, as well as £1.5m for the repair of Cloddach Bridge, near Elgin, and £20m for the restoration of the Holyhead Breakwater in Anglesey
Up to £3m to extend the Tackling Paramilitarism Programme in Northern Ireland.

Enterprise

To provide the right conditions for businesses to succeed:

A ‘full expensing’ policy will apply from 1 April 2023 until 31 March 2026 to allow investment in IT, plant or machinery to be deducted in full and immediately from taxable profits
An increased rate of relief for loss-making R&D-intensive small and medium size enterprises (SMEs) – eligible companies will receive a £27 credit from HMRC for every £100 of R&D investment
An extension of higher reliefs for theatres, orchestras, museums and galleries for two further years

The Medicines and Healthcare products Regulatory Agency (MHRA) will receive £10m extra funding over two years
All of the recommendations from Sir Patrick Vallance’s review of pro-innovation regulation of digital technologies are accepted
£900m of funding for AI Research Resource and an exascale computer as well as a commitment to £2.5bn ten-year quantum research and innovation programme through the government’s new Quantum Strategy

Innovation Accelerators programme – £100m funding for 26 transformative R&D projects
AI Challenge Prize – £1 million prize every year for the next ten years to researchers that drive progress in critical areas of AI.

Employment

The Chancellor turned next to Employment, with a suite of new measures to “remove the barriers that stop people who want to from working.” To achieve this, he announced:

Mature workers

The expansion of the DWP’s ‘midlife’ MOT scheme, aiming to reach up to 40,000 individuals per year (up from the current 8,000)
New ‘Returnerships’ scheme to make existing skills programmes more accessible to older workers and help them upskill and retrain
A pension tax relief overhaul; see details in Personal Taxation and Pensions section.

People with long-term illnesses and disabilities

A white paper on disability benefits reform
The abolition of the Work Capability Assessment for disability benefits claimants
A new voluntary employment scheme for people with disabilities
£406m to increase support for working adults with mental health, musculoskeletal and cardiovascular problems.

Welfare recipients

An increase to the Administrative Earnings Threshold
A stronger sanctions regime for Universal Credit claimants.

Care leavers

A 50% increase in funding for the Staying Close programme
An increase in the Qualifying Care Relief threshold to £18,140 per year plus £375 to £450 per person cared for per week for 2023/24 and these thresholds will then be index-linked, representing a tax cut worth approximately £450 per year on average.

Education

Mr Hunt then turned to Education, stating that he wants to reform the childcare system, currently “one of the most expensive systems in the world.”

His new proposal will offer 30 free hours of childcare each week to pre-school-age children aged nine months or above in English households where both parents work. It will be phased in on the following timeline:

April 2024 – eligible two-year-olds will receive 15 hours of free childcare per week
September 2024 – qualifying children aged nine months to two years will receive 15 hours
September 2025 – eligible children aged nine months to three years will receive 30 hours.

Also, schools and local authorities will be funded to increase availability of wraparound care, to enable parents of school-age children to drop them off between 8am and 6pm.

To tackle the problem of unaffordable upfront costs, Mr Hunt also announced support for the 700,000 families on Universal Credit. Another major change involves each staff member in England being able to look after five two-year-olds instead of four, as is already the case in Scotland.

Personal Taxation and Pensions

To encourage over-50s to extend their working lives, the government is increasing tax relief limits on pension contributions and pots – the Annual Allowance will be raised from £40,000 to £60,000 from April 2023; the Lifetime Allowance (LTA) charge will be removed from April 2023, and the LTA will be abolished from April 2024. The maximum amount that can be accessed tax free (Pension Commencement Lump Sum) will be frozen at its current level of £268,275 (25% of current LTA). From April, the minimum Tapered Annual Allowance (TAA) and the Money Purchase Annual Allowance (MPAA) will increase from £4,000 to £10,000 and the adjusted income threshold for the TAA will also rise, from £240,000 to £260,000.

As a reminder, the following changes were previously announced in the Autumn Statement 2022:

The Income Tax additional rate threshold (ART) at which 45p becomes payable is lowered from £150,000 to £125,140 from April 2023. The ART for non-savings and non-dividend income will apply to taxpayers in England, Wales and Northern Ireland
The Dividend Allowance reduces from £2,000 to £1,000 from April 2023 and to £500 from April 2024
The annual Capital Gains Tax exemption reduces from £12,300 to £6,000 from April 2023 and to £3,000 from April 2024
The Stamp Duty Land Tax nil-rate threshold for England and Northern Ireland is £250,000 for all purchasers and £425,000 for first-time buyers, remaining in place until 31 March 2025.

In addition:

The Income Tax Personal Allowance and higher rate threshold remain at £12,570 and £50,270 respectively until April 2028 (rates and thresholds may differ for taxpayers in parts of the UK where Income Tax is devolved)
The basic State Pension will increase in April 2023 from £141.85 per week to £156.20 per week, while the full new State Pension will rise from £185.15 to £203.85 per week. The standard minimum income guarantee in Pension Credit will also increase in line with inflation from April 2023 (rather than in line with average earnings growth)
Inheritance Tax (IHT) nil-rate bands remain at £325,000 nil-rate band, £175,000 residence nil-rate band, with taper starting at £2m – fixed at these levels until April 2028
National Insurance contributions (NICs) Upper Earnings Limit (UEL) and Upper Profits Limit (UPL) are frozen until April 2028
The ISA (Individual Savings Account) allowance remains at £20,000 and the JISA (Junior Individual Savings Account) allowance and Child Trust Fund annual subscription limits remain at £9,000.

Other key points

Potholes Fund – an extra £200m for local road maintenance in England in 2023/24
Alcohol Duty – rates frozen until August 2023 then uprated by RPI, Draught Relief increased to 9.2% for beer and cider and 23% for wine from 1 August 2023
Fuel duty rates – maintaining the rates of fuel duty at the current levels for an additional 12 months
Defence spending – an extra £4.95bn for defence over 2023/24 and 2024/25
Support for veterans – an additional £33m over the next three years
Swimming Pool Support Fund – over £60m for public swimming pools across England
Support for charities and community organisations – £100m (England)
Plastic Packaging Tax rate – uprated in line with CPI from 1 April 2023
Launching ‘Great British Nuclear’ – supporting new nuclear builds, £20bn available for Carbon Capture, Utilisation and Storage (CCUS), and extending the Climate Change Agreement scheme for a further two years
Devolved administrations – receiving an additional £630m through the Barnett formula over 2023/24 and 2024/25 (Scottish Government £320m, Welsh Government £180m and Northern Ireland Executive £130m).

Closing comments

Jeremy Hunt signed off his announcement saying, “Today we build for the future with inflation down, debt falling and growth up. The declinists are wrong and the optimists are right. We stick to the plan because the plan is working.”

It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding of the Budget and taxation and can be subject to change in future. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK; please ask for details. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on individual circumstances.

All details are believed to be correct at the time of writing (15 March 2023)

Economic Review February 2023

Jenny Procter blog economic update

You can download this update here

Interest rate peak may be approaching

Last month the Bank of England (BoE) announced another hike in its benchmark interest rate but hinted that rates may now be nearing a peak, as the tide in its battle with inflation begins to turn.

Following its latest meeting held at the beginning of February, the BoE’s nine-member Monetary Policy Committee (MPC) voted by a 7–2 majority to raise Bank Rate by 0.5 percentage points to 4.0%. This was the tenth consecutive increase sanctioned by the MPC and took rates to their highest level in over 14 years.

The minutes to the meeting noted that ‘considerable uncertainties’ around the outlook remain and that risks to inflation are ‘skewed significantly to the upside.’ However, they also stated that updated MPC projections show ‘inflation falling back sharply’ from current elevated levels, with the headline rate expected to dip to around 4% towards the end of the year.

Commenting after announcing the MPC decision, BoE Governor Andrew Bailey cautiously acknowledged that price rises have begun to edge back. Mr Bailey said, “We’ve seen the first signs that inflation has turned the corner. But it’s too soon to declare victory just yet –inflationary pressures are still there.”

The latest official inflation statistics also suggest the headline rate is now on a downward path. The Consumer Prices Index (CPI) annual rate – which compares prices in the current month with the same period a year earlier – fell to 10.1% in January. This represents the third successive monthly decline since CPI inflation hit a 41-year high of 11.1% in October.

Although analysts do still typically expect the MPC to sanction at least one more hike, there does seem to be a growing consensus that the high point in the current interest rate cycle is approaching. The next MPC meeting is due to conclude on 23 March.

Bank of England predicts shallower recession

Updated economic forecasts published last month by the BoE suggest the UK will enter recession this year but that the downturn will be less severe than previously feared.

According to the latest economic growth figures released by the Office for National Statistics (ONS), the UK narrowly avoided entering recession at the end of 2022. Despite monthly data showing the economy shrank by 0.5% in December, growth in the previous two months resulted in an overall growth rate of zero across the final quarter of last year.

While this figure is only a first estimate and may therefore be revised, either up or down, it does currently show the UK avoided a second successive quarterly contraction which would have met the technical definition of a recession. Analysts, however, still expect further economic weakness this year – CBI Lead Economist Ben Jones, for instance, commented, “We may have avoided a technical recession late last year, but we probably won’t avoid one this year.”

The BoE’s latest economic assessment also suggests the UK will enter recession during the coming months, although their revised projections imply any downturn will be ‘much shallower’ than previously envisaged. The Bank now expects the economy to shrink by 0.5% during 2023, significantly lower than the 1.5% contraction forecast in November, with the recession expected to last five quarters rather than eight as previously predicted.

Survey data released towards the end of last month has even raised hopes that the UK might actually avoid recession altogether during the first half of this year. The preliminary headline figure from the S&P Global/CIPS UK Purchasing Managers’ Index jumped to 53.0 in February, up from 48.5 the previous month. This is the first time since July that the reading has been above 50, the threshold which indicates growth in private sector output.

Markets (Data compiled by TOMD)

On 27 February, Prime Minister Rishi Sunak and European Commission President Ursula von der Leyen announced a new agreement had been reached on post-Brexit trading arrangements for Northern Ireland. At month end, investors were digesting the trade deal between the UK and the European Union.

In the UK, the FTSE 100 hit the 8,000 milestone for the first time in mid-February, as concerns of a global recession began to ease. Shares were supported by the release of better-than-expected inflation data. The blue-chip index moderated to close the month on 7,876.28, a gain of 1.35% in February. The FTSE 250 ended the month up 0.25% on 19,903.28, while the FTSE AIM closed out the month on 859.37, a small monthly loss of 0.97%.

In the US, the NASDAQ closed February on 11,455.54, a loss of 1.11%. The Dow Jones index closed the month down 4.19% on 32,656.70. In Japan, the Nikkei 225 closed February up 0.43%, on 27,445.56. Japan equities were supported at month end by gains in the Machinery, Precision Instruments and Electrical / Machinery sectors. On the continent, the Euro Stoxx 50 closed the month on 4,238.38, registering a gain of 1.80%.

On the foreign exchanges, the euro closed the month at €1.14 against sterling. The US dollar closed at $1.20 against sterling and at $1.06 against the euro.

Brent crude closed the month trading at around $83 a barrel, a loss of 1.77% over the month. Gold closed the month trading at around $1,824 a troy ounce, a monthly loss of 5.16%. The gold price has been negatively impacted in the month following the release of strong economic data, fuelling expectations of more interest rate increases.

Index Value (28/02/23) Movement since 31/01/23

FTSE 100 7,876.28 +1.35%

FTSE 250 19,903.28 +0.25%

FTSE AIM 859.37 -0.97%

Euro Stoxx 50 4,238.38 +1.80%

NASDAQ Composite 11,455.54 -1.11%

Dow Jones 32,656.70 -4.19%

Nikkei 225 27,445.56 +0.43%

Retail sales rebound unexpectedly

Official data has revealed a surprise increase in sales volumes during January, although more recent survey evidence does suggest the retail outlook remains challenging.

According to the latest ONS data, total sales volumes in January rose by 0.5%, as shoppers sought to take advantage of New Year sales promotions. ONS said discounting helped lift sales at online retailers as well as jewellers, cosmetic stores and carpet and furnishing shops, although growth was also partly driven by an increase in fuel sales as prices at the pumps continued to decline.

Data revisions, however, saw December’s figure fall more sharply than previously reported, with updated data showing a drop of 1.2% from November rather than the originally estimated 1.0% decline. Darren Morgan, Director of Economic Statistics at ONS, commented, “After December’s steep fall, retail sales picked up slightly in January, although the general trend remains one of decline.”

This challenging environment was also highlighted in the CBI’s latest Distributive Trades Survey, with retailers reporting broadly unchanged sales volumes in February while expecting sales to fall this month. CBI Principal Economist Martin Sartorius said, “Whilst retail sales volumes were largely unchanged in the year to February, firms remain pessimistic about their business outlook.”

Chancellor receives pre-Budget boost

The latest public sector finance statistics revealed an unexpected budget surplus giving Chancellor Jeremy Hunt a little more leeway as he prepares to deliver his Spring Budget.

Figures released by ONS showed that UK public sector net borrowing (the gap between the country’s overall income and expenditure) returned to a surplus of £5.4bn in January. This figure, which was boosted by the highest self-assessed Income Tax receipts since records began in 1999, was significantly better than economists had been expecting.

As a result, total government borrowing across the first ten months of the current fiscal year now stands at £117bn. While this does still represent a large shortfall by historic standards, the figure is just over £30bn lower than the Office for Budget Responsibility had predicted when it produced forecasts for the Chancellor’s Autumn Statement in November.

This data does therefore appear to provide the Chancellor with a little more wiggle room as he sets out the tax and spending plans he will deliver in the Spring Budget on 15 March. Mr Hunt, however, has played down any suggestions of significant tax cuts recently saying, “It is vital we stick to our plan to reduce debt over the medium term.”

It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. No part of this document may be reproduced in any manner without prior permission.

All details are correct at the time of writing (01 Mar 2023).

Economic Review January 2023

Jenny Procter blog economic update

You can download this update here

UK growth beats expectations

The latest gross domestic product (GDP) statistics show the economy unexpectedly grew in November easing fears that the UK has already slipped into recession.

Data released by the Office for National Statistics (ONS) revealed that the UK economy expanded by 0.1% in November. This figure was higher than any forecast submitted to a Reuters poll of economists with the consensus prediction suggesting the economy would shrink by 0.2% across the month.

ONS said much of the growth was linked to the football World Cup, with pubs and restaurants benefiting as people went out to watch the games. The figures were also boosted by an increase in demand for services in the tech sector.

November’s better than anticipated data makes it more likely that the UK managed to avoid entering recession during the final half of last year. Economists are now typically forecasting that GDP will have flatlined during the fourth quarter of 2022 and thereby dodged the technical definition of a recession.

However, the consensus view does still suggest the UK is likely to record two negative quarters of growth during the first half of this year as consumers continue to struggle with rising food and energy bills, and ongoing industrial action acts as a drag on growth. A recent Reuters poll puts a 75% chance on the UK slipping into recession this year, although any downturn is expected to be relatively shallow.

This view was largely supported by data from the recently released S&P Global Purchasing Managers’ Index. While the closely monitored survey recorded a sixth consecutive monthly decline in UK business activity during January, the scale of the downturn signalled by the data remains relatively modest by historic standards. There was also some positive news from forward-looking indicators, with a jump in business optimism for the year ahead.

Inflation expected to fall rapidly

Bank of England (BoE) Governor Andrew Bailey has suggested that a recent easing in the headline rate of inflation could be a sign that “a corner has been turned.”

Data released last month by ONS showed that the Consumer Prices Index (CPI) annual rate – which compares prices in the current month with the same period a year earlier – fell to 10.5% in December. This was the second successive monthly decline since inflation hit a 41-year high of 11.1% in October.

ONS said that easing price pressures for motor fuels and clothing had pushed down December’s headline rate. Dips in these sectors, however, were partially offset by a further sharp rise in the cost of food and non-alcoholic drinks, while restaurant and hotel prices also increased significantly.

Despite the latest fall, the annual rate of CPI inflation clearly remains well above the BoE’s 2% target level. Indeed, when releasing the data, ONS Chief Economist Grant Fitzner pointed out that, “Although we’ve seen a second consecutive easing, it is a fairly modest fall and inflation is still at a very high level with overall prices rising strongly.”

Economists and policymakers, however, are increasingly predicting that inflation has now peaked. Last month, for example, the BoE Governor said inflation looks set to fall “quite rapidly” from the spring as energy prices decrease and that the Bank was more optimistic inflation could be on an “easier path.”

Other data published last month also points to easing inflationary pressures. The latest producer prices data from ONS, for instance, unexpectedly revealed a drop in manufacturers’ input and output prices in December, with both recording the largest monthly fall since April 2020. In addition, a CBI survey found that British factories reported the slowest growth in costs for almost two years during the three months to January.

Markets (Data compiled by TOMD)

Major global indices closed January in positive territory. As the month drew to a close, investors were looking ahead to the Federal Reserve and Bank of England monetary policy decisions in early February.

In the UK, the FTSE 100 ended January on 7,771.70, a gain of 4.29% in the month. The domestically focused FTSE 250, more closely correlated to the UK economy, closed the month up 5.31% on 19,853.45, while the FTSE AIM closed January on 867.82, a monthly gain of 4.39%. UK markets were impacted at month end after the International Monetary Fund’s forecast detailed lagging growth versus G7 counterparts.

Across the pond, the Dow Jones index closed January up 2.83% on 34,086.04, while the NASDAQ closed the month up 10.68% on 11,584.55, amid a flurry of corporate earnings and the imminent Fed policy meeting. On the continent, the Euro Stoxx 50 closed the month on 4,163.45, registering a gain of 9.75%. In Japan, the Nikkei 225 closed January up 4.72%, on 27,327.11.

On the foreign exchanges, the euro closed the month at €1.13 against sterling. The US dollar closed at $1.23 against sterling and at $1.08 against the euro.

Gold closed the month trading at around $1,923 a troy ounce, a monthly gain of around 6.0%. The gold price has risen as demand for the precious metal holds firm in the face of economic uncertainty. Brent crude closed the month trading at around $85 a barrel, a small monthly gain of 0.77%. The next OPEC+ (Organization of the Petroleum Exporting Countries and allies) producer meeting in early February will provide clarity on the trajectory of global supplies.

Index Value (31/01/23) Movement since 31/12/22

FTSE 100 7,771.70 +4.29%

FTSE 250 19,853.45 +5.31%

FTSE AIM 867.82 +4.39%

Euro Stoxx 50 4,163.45 +9.75%

NASDAQ Composite 11,584.55 +10.68%

Dow Jones 34,086.04 +2.83%

Nikkei 225 27,327.11 +4.72%

Pay growth picks up pace

While the latest earnings statistics revealed that wages are now rising at their fastest rate in over 20 years, the data also showed that pay growth is still failing to keep up with the rise in prices.

According to figures released last month by ONS, average weekly earnings excluding bonuses rose at an annual rate of 6.4% in the three months to November. This figure represents the strongest growth in regular pay since records began in 2001, excluding the coronavirus period when the data was distorted by workers returning from furlough.

However, despite this historically high level of nominal earnings growth, the real value of people’s wages continues to fall, with regular pay levels actually down by 2.6% when adjusted for inflation. Although this decline is slightly smaller than the 3.0% fall in real regular pay reported in Q2 2022, it still represents one of the largest real declines in wages ever recorded.

The latest data also highlighted the wide disparity in pay growth for private sector and public sector workers. In the three months to November, private-sector regular pay levels rose by an average annual rate of 7.2% compared with 3.3% across the public sector.

Retail sales suffer December decline

Official data shows that sales volumes fell in December, capping a difficult year for the retail sector, while more recent survey evidence suggests conditions remain challenging.

The latest ONS retail sales statistics revealed that total sales volumes in December unexpectedly fell by 1.0% from the previous month and by a record 5.8% compared with December 2021. Across the whole year, sales volumes declined by 3.0% compared with 2021, the worst full-year performance since records began in 1997.

While rising prices did see many retailers report relatively strong festive sales figures in monetary value terms, the official data shows that high inflation has resulted in shoppers effectively getting less for their money. ONS also noted that feedback from retailers suggested consumers were “cutting back on spending because of increased prices and affordability concerns.”

Survey data suggests sales volumes continued to slide in the new year, with the CBI’s latest Distributive Trades Survey showing a net balance of retailers reporting year-on-year sales growth falling to -23% in January. CBI Principal Economist Martin Sartorius said, “Retailers began the new year with a return to falling sales volumes, as the sector continues to face the twin headwinds of rising costs and squeezed household incomes.”

All details are correct at the time of writing (01 Feb 2023).

It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. No part of this document may be reproduced in any manner without prior permission

Your Finance Matters Winter 2023

Jenny Procter blog children, economic update, family, investments, pensions

You can download this update here

Investment focus for the new year

By any comparison, the past 12 months have been tough for investors with a series of shocks impacting markets and, as 2023 dawns, uncertainties remain. One constant on the investment horizon, though, is the requirement to be strategic with your portfolio. A sound strategy based on careful planning; making purposeful decisions, based on thorough research and reliable processes, will stand you in good stead.

Last year saw markets struggle with bouts of volatility as a combination of high inflation, rising interest rates and the war in Ukraine brought about challenging headwinds and markets sought a stable footing. As a result, fund inflows slowed while cash as a percentage of investors’ portfolios rose, prompting warnings that investors need to be aware of limitations to the Financial Services Compensation Scheme (FSCS) for cash balances.

Identifying opportunities

With large amounts of money on the sidelines, using our knowledge, we aim to identify opportunities and position portfolios to benefit from recession-resistant companies in which we have conviction. Those who still have the capacity to invest should consider adding back to their portfolios in order to take advantage of any potential low valuations.

Battling inflation

Investors also need to be aware of the erosive impact of inflation on cash-based savings. In the current economic climate, anyone holding a significant proportion of their assets in cash, even with savings rates improving, will inevitably see the value of their wealth decline in real terms. In essence, equities offer a better potential defence in the battle with inflation.

Trust in our process

Experienced investor or not, staying calm during periods of market turmoil is never easy but adapting your mindset and focusing on investment strategy rather than market sentiment is vital. Investing in the stock market does clearly involve a level of risk but the adoption of a carefully considered strategy based on sound financial planning principles undoubtedly offers investors the best chance of success.

Tax year end reminder

As the end of the tax year approaches, a prime consideration should be how external factors such as reduced or frozen allowances, together with high inflation, could impact your finances and what action you need to take before 5 April 2023.

If you are affected by the impending changes to Dividend Tax or Capital Gains Tax (CGT) announced in the Autumn Statement, have you considered investing up to £20,000 this tax year in a stocks and shares Individual Savings Account (ISA)? From April 2023, the Dividend Allowance will be cut from £2,000 to £1,000 and then fall further to £500 from April 2024.

In addition, the annual CGT exemption will fall from £12,300 to £6,000 next tax year and then to £3,000 the following tax year. Dividends received on shares within an ISA are tax free and won’t impact your Dividend Allowance. Also, any profit you make when selling investments in your stocks and shares ISA is free of CGT.

And don’t forget your pension

Both the Annual Allowance and Lifetime Allowance are frozen, at £40,000 and £1,073,100 respectively. As these allowances haven’t increased with inflation, it effectively means those saving to the maximum extent possible with tax concessions can save less in real terms each year.

In the news

Women hold their nerve

Recent research¹ reveals women are more likely to hold their nerve and avoid crystallising a loss when the market dips. Almost half of men (48%) have sold investments at a loss when they’ve dropped in value, in an attempt to stem their losses, while just 38% of women have done the same. Such impatience could prove to be costly. The research estimates (based on £10,000 invested in 1992, adding 10% of average salary and reinvesting dividends until 2022) that the real cost of ‘impatient’ investing over 30 years could amount to nearly £200,000!

Where is the best place to retire?

Retiring abroad is a much-desired goal for many, particularly for an improved lifestyle. Croatia currently tops the list of the best countries to retire in, due to a better cost of living when compared with the UK – rent costs and the price of day-to-day living is nearly half that versus the UK².

Croatia also scores highly due to the ease of getting there from the UK, with relatively cheap average flight costs meaning that friends and family can visit and flying back to the UK is also convenient. (Relocation to some countries may mean forgoing future annual increases to State Pension.)

¹Alliance Trust, 2022

²Penfold, 2022

Global economic growth in 2023

The International Monetary Fund (IMF)³ has predicted a challenging 2023, reducing growth expectations and forecasting economic contraction in a third of the world, in its latest World Economic Outlook entitled ‘Countering the Cost-of-Living Crisis.’

With the cost-of-living crisis ‘tightening financial conditions in most regions’, the outlook suggests that in order to restore price stability, monetary policy should stay the course and fiscal policy should aim to alleviate pressures ‘while maintaining a sufficiently tight stance.’

The global growth rate for 2023 has been revised down from previous expectations to 2.7%. This reflects ‘significant slowdowns’ for the largest economies as America’s gross domestic product (GDP) contracted in the first half of 2022, followed by the Euro area’s contraction in the second half of last year, and prolonged COVID-19 outbreaks and lockdowns in China. Closer to home, the IMF predict growth of 3.6% in 2022 and 0.3% in 2023 for the UK.

³IMF, 2022

Dividend update

According to the latest Dividend Monitor⁴, driven by sterling weakness, 2022 headline payouts are expected to rise to £97.4bn, up 11.0% on an adjusted basis, with underlying dividends expected to rise 13.4% to £87.2bn. The provisional forecast for UK dividends in 2023 anticipates a slight drop in headline dividends but modest underlying growth.

Looking ahead, Ian Stokes, Managing Director of Corporate Markets UK and Europe at Link Group commented, “For 2023, we expect a further reduction in mining dividends and likely lower one-off special dividends but outside the mining sector there is still room for payouts to rise, even with a weakening economy. Our provisional 2023 forecast suggests a slight drop in headline dividends to £96bn and a slight increase in the underlying total to £89bn. This implies no change in our expectation that UK payouts will only regain their pre-pandemic highs some time in 2025.”

⁴Link Group, 2022

Giving your children a helping hand

With the current generation of graduates typically leaving university with a mountain of debt, it is perhaps unsurprising that so many parents are now looking to ease the burden by investing on their children’s behalf.

University challenge

Government statistics show the average debt accumulated by a university student is currently around £45,000. Thankfully, graduates only start repayments when their earnings hit a certain threshold and, at the moment, loans are written off after 30 years however much debt remains. As a result, some students will never pay back their loans in full.

Increasing debt burden

Many students, though, do repay a significant amount of their debt, and recent reforms to the loans system means many more will do so in the future – government forecasts suggest that, from next year, over half of students will repay their loans in full. This inevitably places an even greater burden on future graduates’ shoulders, both as they enter the world of work and, potentially, throughout their entire careers.

Saving for their future

Most parents are keen to help their children fund university and many do so by investing on their behalf through a stocks and shares Junior ISA (JISA). While there are risks with stock market investments, historically they have performed better than cash-based savings and consistently delivered above-inflation returns. The annual JISA allowance is currently £9,000 per child which, for anyone who starts saving early, can grow to a sizeable tax-free lump sum. Smaller amounts can mount up too, particularly when combined with contributions from other family members.

Peace of mind

Investing on a child’s behalf can make a huge difference to their future, whether they decide to go to university or put the money towards something else. It also provides parents with the comfort of knowing they are giving their children the best possible start to adult life.

Take control now to beat the tax chill

Following his controversial ‘stealth tax’ Statement in November, the Chancellor made a raft of key personal taxation and pension announcements.

The government pledged its commitment to the pensions Triple Lock, which will increase the State Pension in line with September’s Consumer Prices Index (CPI) rate of 10.1%. This means that the value of the basic State Pension will increase in April 2023 from £141.85 per week to £156.20 per week, while the full new State Pension will rise from £185.15 to £203.85 per week.

Then came some ‘stealth’ announcements set to pull people into paying higher rates of tax, more people paying IHT, a cut to tax-free earnings from dividends and a reduction in CGT allowances.

In addition to the Dividend Allowance and CGT allowance reductions (as per ‘Tax year end reminder’ article) and IHT freeze (see page 4), other key personal tax announcements from the Scottish

Budget included:

The Income Tax additional rate threshold (ART) at which 45p becomes payable will be lowered from £150,000 to £125,140 from 6 April 2023. The ART for non-savings and non-dividend income will apply to taxpayers in England, Wales and Northern Ireland. The ART for savings and dividend income will apply UK-wide. This move is set to push 250,000 more people into this band
The Income Tax Personal Allowance and higher rate threshold are to remain at current levels – £12,570 and £50,270 respectively – until April 2028 (rates and thresholds may differ for taxpayers in parts of the UK where Income Tax is devolved).

With an increasing number of people likely to be impacted by these changes, we can’t stress enough the importance of tax year end planning. Although some of these changes don’t come in with immediate effect, it is vital to ensure you are in the best place possible to take advantage of any allowances, exemptions and reliefs available this year and to prepare for the changes that come in over the next few years. With plenty to consider and factor into your financial plan, valuable financial advice remains central to achieving your goals and aspirations.

It pays to think about estate planning

Inheritance Tax (IHT) is once again in the spotlight following the Chancellor’s decision to freeze IHT thresholds for a further two years until April 2028. Extending the frozen thresholds, together with rising house prices and soaring inflation mean that more estates are likely to be affected.

IHT receipts on an upwards trend

The latest IHT figures released in October make interesting reading. Total HM Revenue and Customs (HMRC) receipts for April 2022 to September 2022 were £3.5bn, £0.4bn higher than in the same period last year.

Not just a tax on the very wealthy

IHT is a tax payable on all your assets when you die and potentially on some gifts you make during your lifetime. If the estate is liable for IHT, it is usually payable at 40%. These days, you don’t have to be hugely wealthy to be affected by IHT – the hated tax can cost your estate thousands of pounds when you die.

A reminder of the thresholds

An individual’s current threshold, or nil-rate band, is £325,000. A couple (married or civil partners) has £650,000. Any unused nil-rate band can be passed to the surviving spouse or civil partner on death.

In 2017 the government introduced an additional nil-rate band when a residence is passed on death to a direct descendant. The main residence nil-rate band is £175,000 and when added to the existing threshold of £325,000 could potentially give an overall allowance for individuals of £500,000.

To reduce the amount of IHT payable, many families consider giving assets away during their lifetime. Some gifts will be automatically free from IHT; for example, £3,000 each financial year, certain wedding gifts and gifts to charities.

Getting the right balance between gifting money during your lifetime and ensuring you have enough for your future years requires careful planning. Expert planning can legitimately mitigate IHT, meaning you can pass on assets to your family as you’d intended.

Time for a retirement reboot?

Nowadays there are more choices open to you than ever before. This means there are more things you need to consider and have a plan for, like how to manage your finances to provide the income you’ll need to live on, how you’ll transition into full retirement and what lifestyle you want to enjoy in your later years.

We’re all leading busy lives and with cost-of-living financial pressures intensifying, it’s understandable if retirement plans have been placed on the back burner. If you are keen to revisit your plans and get them back on track so you can relax and fully enjoy your retirement years, the new year is the perfect time to act, so please do get in touch.

If you would like advice or information on any of the areas highlighted in this newsletter, please get in touch, we’d be delighted to help you consider your personal financial circumstances.

It is important to take professional advice before making any decision relating to your personal finances. Information within this newsletter is based on our current understanding of taxation and can be subject to change in future. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK; please ask for details.

We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency. Taxation depends on individual circumstances as well as tax law and HMRC practice which can change.

The information contained within this newsletter is for information only purposes and does not constitute financial advice. The purpose of this newsletter is to provide technical and general guidance and should not be interpreted as a personal recommendation or advice.

The Financial Conduct Authority (FCA) does not regulate Will writing, tax and trust advice and certain forms of estate planning.

All details are correct at time of writing – December 2022.

economic update

UK economy rebounds in November

Official statistics show the economy returned to growth in November, although analysts believe it remains a close call as to whether or not the UK will once again manage to avoid a recession.

Surprise uptick in inflation rate

Last month’s release of consumer price statistics revealed a small increase in the UK headline rate of inflation, bucking analysts’ expectations for a further easing in price pressures.

Markets (Data compiled by TOMD)

Major global indices were mixed at the end of January. On the last trading day of the month the FTSE 100 lost ground ahead of imminent interest rate decisions in the UK and US.

Government borrowing lower than expected

The latest public sector finance statistics revealed a smaller-than-expected budget deficit providing the Chancellor with more room for manoeuvre as he prepares to deliver his Spring Statement in March.

Retail sales fall sharply

Data released last month by ONS revealed that the UK retail sector suffered its sharpest decline in sales volumes for almost three years.

All details are correct at the time of writing (01 February 2024)

Financial health is financial wealth.

If you want to be financially healthy, please book an initial meeting and let’s discover if we can help you

Call us on 01332913006

Preparing portfolios for resilience in 2024

Geopolitical risk

Economic prospects

Investment pragmatism

New year, new opportunities

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

Global dividends – encouraging growth?

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

In the news

Who wants to be an (ISA) millionaire?

More people choose living inheritances

One million more over-65s still at work

The financial pitfalls that primarily affect women

Research5 has shone a spotlight on the financial challenges that prevent women from accumulating the same wealth as their male counterparts.

The findings

Let’s do something about it – together

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

The sophisticated scammers targeting YOU

According to a study from NatWest7, seven in 10 people have been targeted by scams over the last 12 months. Vulnerabilities brought on by cost-of-living challenges have likely contributed to the high numbers.

Avoid, avoid, avoid

Phishing scams (37%)

Trusted organisation scams (21%)

Refund scams (13%)

Keep yourself (and your money) safe

Are you due a midlife MOT?

Just to be clear, we’re not talking about your physical health here (that’s the doctor’s remit). We’re talking about a check-up to assess your financial wellbeing.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

Planning for a secure financial future

Plan, plan, plan

Gender gap

Triple default trap

Here to support you

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

Prospects of stronger economic growth

Global recovery remains slow

Challenges ahead but growth prospects

Diversification is key

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

Financial health is financial wealth.

If you want to be financially healthy, please book an initial meeting and let’s discover if we can help you

Call us on 01332913006

Economy stages partial rebound

Markets (Data compiled by TOMD)

Jobs market continues to cool

Retail sales in autumnal fall

All details are correct at the time of writing (01 November 2023 )

Financial health is financial wealth.

If you want to be financially healthy, please book an initial meeting and let’s discover if we can help you

Call us on 01332913006

UK growth rate exceeds expectations

The latest gross domestic product (GDP) statistics revealed that the UK economy grew more strongly than expected in June, although more recent survey data does suggest a renewed contraction looks ‘inevitable.’

Interest rates rise again

Early last month, the Bank of England (BoE) announced a further hike in its benchmark interest rate and warned that rates were likely to remain high for some time.

Markets (Data compiled by TOMD)

At the end of August, major global stock markets closed the month in negative territory. European stock markets were mixed on the last trading day of the month, as key central bank policy meetings approached and investors processed regional inflation data.

Headline inflation rate declines

Official consumer price statistics have revealed a further fall in the UK headline rate of inflation, although the latest data also showed fresh signs of stickiness in terms of core inflation.

Wage growth hits record high

Earnings statistics published last month showed that nominal wage growth rose at a record rate in the three months to June, although more recent survey data does suggest pay deals may have started to cool.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

Financial health is financial wealth.

If you want to be financially healthy, please book an initial meeting and let’s discover if we can help you

Call us on 01332913006

Data released by the Office for National Statistics (ONS) showed the UK inflation rate fell by more than expected in June, leading analysts to predict that interest rates are now likely to rise less sharply than previously feared.

IMF upgrades economic growth forecast

Research⁵ has shone a spotlight on the financial challenges that prevent women from accumulating the same wealth as their male counterparts.

According to a study from NatWest⁷, seven in 10 people have been targeted by scams over the last 12 months. Vulnerabilities brought on by cost-of-living challenges have likely contributed to the high numbers.

**Last month, the BoE announced another hike in its benchmark interest rate and insisted it will ‘stay the course’ in its battle to bring down inflation.**