After a troubling 2022, what will 2023 bring for the UK economy?

After the cost of living and supply chain struggles of 2021 – “panic at the pumps” anyone? – we might have started 2022 feeling slightly more optimistic. 

The Bank of England (BoE) was predicting an inflation peak of around 5%, while, at its November meeting, the BoE’s Monetary Policy Committee (MPC) opted to keep the base rate at 0.1%.

Since then, rates have risen at eight consecutive meetings and inflation has reached double the BoE’s November target (twice). It currently stands at a 41-year-high of 11.1%.

2022 has also seen market volatility, a crashing pound, and a continuing cost of living crisis that threatens to see millions struggling to heat their homes this winter.

So, is it really all doom and gloom? Are we likely to see any improvement in the year ahead? And what will these economic changes mean for your finances?

Keep reading to find out.

Inflation and the base rate

While labour shortages, global supply issues, and events in China had all conspired to see living costs rise in 2021, worse was to come. Russia’s invasion of Ukraine has been a human tragedy and plunged the global economy into turmoil. 

Supply chain issues have been exacerbated, raising gas prices, and leading to the UK government’s energy price cap for domestic and non-domestic users.

As we head into 2023, both inflation and the BoE’s base rate are expected to keep rising in the shorter term.

UK inflation currently sits well above its 2% target. The Consumer Price Index (CPI) is at a 40-year high of 10.1% and isn’t expected to return to the BoE’s 2% target for another two years. The MPC expect the CPI to drop below 2%, but not until 2025.

One of the tools the BoE has to keep inflation in check is the base rate. The base rate is the interest rate that a central bank – in this case, the BoE – charges commercial banks for loans. 

Back in November 2021, it stood at 0.1%. It has since risen at eight consecutive MPC meetings – including its largest single rise since 1989 – to stand at 3%.

Despite these rises, the MPC acknowledge that inflation is high and set to rise higher. The base rate could increase accordingly. 

The finance industry expects the base rate to continue rising, above 4% and possibly as high as 5% in 2023. This is potentially good news for your savings, but bad news for your mortgage.

Mortgage markets reacted to the failed mini-Budget

Another factor that the BoE has had to take into account is the economic fallout from Liz Truss and Kwasi Kwarteng’s failed “fiscal event”. The unfunded tax cuts of the mini-Budget saw overseas investors scarper and the value of the pound against the US dollar tumble.

This immediately led to a rise in mortgage rates. Moneyfacts reported that almost 1,000 products disappeared from the market, only to return at a higher rate. 

If you are on a variable- or tracker-rate mortgage you will likely have seen your repayments increase already. If you are on a fixed-term mortgage, be prepared for increases when the term ends and be ready to shop around.

The Financial Reporter recently confirmed that 48% of homeowners are worried about rising rates but there are steps you can take. A lender might be able to offer payment holidays, reductions over a set period, or an extension of your term. 

A long, slow recession could be on the way

The latest figures confirm that the UK economy is in decline. And though we are not in official “recession territory” yet, the release of the Gross Domestic Product (GDP) figures early next year will likely change that.

The Office for National Statistics (ONS) figures confirm the economy shrank by 0.2% in the three months to September. Many analysts now predict a further drop from October to December. This would mark the second quarter in a row and the official start of a recession. 

Some experts have gone so far as to predict a fall in GDP of around 2% during 2023, meaning tough times are ahead for many. This will only be exacerbated by the £55 billion of tax rises and spending cuts announced in the autumn statement.

Stay calm and focus on your goals

While times are tough currently, the message – as always – is to stay patient and focus long term. Market instability is to be expected but riding out these short-term blips is key. If your goals haven’t changed, your plans don’t need to either.

That said, as the cost of living crisis continues, you might find money is tighter than usual. If you need any help juggling your household budget, we are here for you. 

Whether you’re managing retirement income that isn’t going quite as far as it used to or struggling to save toward retirement while you manage other commitments (like a rising mortgage) we can help. 

Get in touch

If you’re worried about any aspect of the current economic climate and its effect on your long-term finances, we can help. Please get in touch via email at enquiries@hda-ifa.co.uk or call 01242 514563.

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.