This article is a guest post provided by Innovation Visual client, Menzies LLP.
We would like to thank author Mark Perrin, Strategic Advisory Partner for his expertise and insight. We would also like to thank Richard Davis BSc BFP ACA for all his help in preparing this article for us.
The Background
After what could be described as a turbulent 2022, one thing is now clear; the UK is in recession and, whilst the markets have been somewhat calmed compared to this time last year, it is yet to be determined the extent to which the UK will be affected. As with most economic matters, the future is (to some degree) dependant on the actions of other nations where the UK will be compared to other major world economies on the world stage.
Although the political landscape has settled when compared to the musical chair style reorganisations within the conservative party of last year, the pressure on the UK government is still at an all-time high with fears of rising inflation levels and interest rates. Changing demographics, advancing technology, the green revolution and the Ukrainian conflict will all certainly play a role in shaping the economic climate; the extent to which, however, may not be known for a number of years.
Fiscal Policy Changes
As a result of the government’s response to the COVID pandemic, public sector net debt is extremely high, with the interest alone surmounting to £7.3bn (the highest figure since 1997). In order to fund this bill, the government has three major options; borrow more, cut spending, or raise taxes. Following the swift reversal of a significant number of the policies introduced by Liz Truss’s mini budget, the autumn statement has provided more stable policy changes which undoubtably indicate the latter is the option they have chosen.
There is an undeniable pressure to keep tax rates low for the average person where the cost-of-living crisis is hitting hard. This was noticed in the Autumn statement, that significantly affected the higher earners of society, with the additional rate band for income tax and annual exempt amount for capital gains tax being lowered and the inheritance tax thresholds being maintained.
What is not known is whether these measures are enough to fund the current levels of spending, especially noting the stresses on the NHS which have been highlighted by the recent strikes. It is therefore likely that additional changes are to come in the spring statement, with speculations that the business asset disposal relief (formerly entrepreneurs’ relief) could be scrapped, and increases are expected to capital gains tax rates and employers’ national insurance.
Employment Changes
2022 ended with unemployment rates approximately one third lower than that of the previous year, however, this may be short lived with the Office of Budget Responsibility predicting a fairly sharp increase throughout 2023. The economic slump is likely to be the main driver behind this rise, as higher costs will lead to employers having to make tough decisions about appropriate staffing levels.
Linked with fiscal changes made by the government, it is likely that 2023 will continue to see strikes across all sectors, as pressure builds on employers to raise wages in order to attract skilled staff in the current time of low unemployment. One thing that may not change is where employees work from, with analysts from Placemake.io and Visitor Insights finding that phone activity was half the normal level on a Monday, and Friday is almost indistinguishable to that of the weekend. This is directly linked to the movement of employees, showing that a significant number of employees are not returning to the office.
Source: OBR analysis of ONS and OBR data. OBR, Economic and fiscal outlook November 2022
Property Changes
The increased levels of working from home are showing in the property sector with many employers shifting to remote working going forward. Real estate firm CBRE Investment Management are on record as saying that empty office space in London has more than doubled in the last three years alone. This should see downward pressure on commercial property prices with expectations of negative capital growth to be realised early 2023.
The residential market is anticipated to be more stable with changing demographics, and an increase in the number of people working remotely, predicted to maintain demand for properties throughout 2023. However, rising interest rates and associated costs has led to mortgage approvals falling to their lowest level in two years near the end of 2022 according to the Bank of England. The affordability of properties will undoubtably have a knock-on-effect on house prices themselves with experts and Handelsbanken expecting a 10% fall in 2023.
Source: OBR, The Economy Forecast, Housing Market, November 2022
The Year of Bitcoin?
A decade ago, only a handful of people had heard of cryptocurrency let alone invested in it, today you would be hard-pressed to find someone who hasn’t heard of it. Crypto has almost certainly had a bad year in 2022 with the crash of Terra Luna (a supposed “Stablecoin”), Celsius going bankrupt and the founder of FTX arrested on alleged fraud charges.
The consensus for speculative investors is that there will be no sudden change in the crypto-asset world with governments around the world being slow to adopt (and regulate) the changes and rising interest rates affecting desired returns. That being said, many predict that 2023 will be the year cryptocurrencies stabilise with future gains more in line with other securities. However, with only 115 addresses holding approximately 19% of all bitcoins in the world and the cost-of-living crisis likely to cause many an investor to cash-out, it could be possible that another significant drop is yet to be seen.
Source: Yahoo Finance
Inflation Changes
Most economists expect inflation to gradually reduce over 2023 after the initial shock reaction to Ukraine’s invasion in 2022. However, it should be noted that inflation is measured based on the cost of a basket of goods over a 12-month period. Therefore, in early 2023 the shock in prices caused by the invasion of Ukraine will no longer factor into the calculation, which should result in a significant sharp drop in inflation.
Although this may sound like a much-needed respite for the consumer, it is unlikely that prices will decrease any time soon as the government will seek to normalise growth by hitting the bank of England’s inflation target of 2%. Furthermore, supply chains will take some time to be restored and it is likely that inflation will slowly drop over the next few years to reflect this.
Source: ONS, Consumer Price Inflation Time Series (MM23)
Planning Ahead To Protect Your Business From Financial turbulence
Although it is impossible to foresee the future, having a strong set of financial advisors can certainly help you predict what may be coming and guide you through the challenging landscape we are currently in. Should you need any guidance in navigating the current climate, please feel free to contact Menzies advisory team to see how they can assist you and your business throughout 2023.
Leveraging The Data To Survive And Thrive In Economic Downturn
Business planning for a successful 2023 is going to be a challenge. Having access to the right data is important but expert analysis and insight from that data will be even more key to helping businesses plan and act effectively during the coming economic turbulence.
The good news that there is a path through, and many businesses have successfully survived recession and come out stronger on the other side of past recessionary periods. The data shows that those businesses are the ones that invest wisely in marketing, to build share of voice during the period when their competitors are pulling in their horns and so reducing the competition in the market. You might like to read this article on the proven benefits of investing in marketing during a recession for more data-led information. We have been working with our clients for some time already, to develop and implement the right digital marketing strategies to support their business growth objectives in 2023.
We're a team of digital marketing experts with decades of experience in driving results for B2B, SaaS, B2C and e-commerce businesses. If you'd like to talk to us about how best to plan your marketing strategy this year, then please just get in touch, we're looking forward to hearing from you.
