WeeklyWatch – UK economy begins to bounce back, but resilience will take time

14^th March 2023

Stock Take

Positive moves in the UK economy

It appears that the UK is starting to recover from the winter of economic discontent. Last Friday brought the news that the economy grew by 0.3% in January, following a decline of 0.5% in December 2022. This rebound was largely driven by the return of the Premier League after the break for the Qatar World Cup and an uptick in school attendance after the winter flu previously ran riot.

Although the news has kicked off sentiment that the recession headlines can be put on ice for a few months, it’s important to remember that the economy still has a lot of ground to recover. The same figures showed a fall in manufacturing and construction output.

Ruth Gregory of Capital Economics observed:

“Looking beneath the surface, the figures suggest the economy is on weaker ground than it appears. We doubt January’s strength will last and our hunch is that there will still be a recession.”

Azad Zangana of Schroders agrees that underlying challenges remain.

“Although we do not expect the Bank of England to raise rates any further, there is a delayed impact from rising rates. By the end of this year, many more households will have come off their fixed-rate mortgage deals and will face a sizable shock when they try to refinance.”

Interest rates drive market fluctuation

Globally, last week saw markets continue to fluctuate, as investors tried to get a handle on the higher-for-longer interest rate outlook.

The first major news of the week was the start of China’s annual National People’s Congress, with outgoing premier Li Keqiang announcing an economic expansion target of around 5% for 2023. Although this is the country’s lowest goal in three decades, it’s perhaps little surprise, given that the Chinese economy grew just 3% last year due to extended COVID-19 lockdowns.

Goldman Sachs said that achieving this modest target was “not challenging”. Indeed, China’s economic growth targets have been trending lower over the past decade as policymakers seek to control the country’s growing debt burden and boost domestic consumption.

Investors were encouraged that slowing growth in China was an anti-inflationary sign – hopes that were boosted by news of a drop in US factory orders. But the same couldn’t be said for European stocks – earlier gains were reversed on fears that the modest growth target suggested less demand for European goods.

Fighting the inflation “monster”

This was followed by Federal Reserve Chairman Jerome Powell giving his keenly awaited six-monthly testimony to the Senate Banking Committee midweek. He warned lawmakers that stronger-than-expected US economic data meant that the speed and size of interest rate hikes may also need to increase, and that “the ultimate level of interest rates is likely to be higher than previously anticipated”.

Markets are now pricing in a half-point increase at the Fed’s next meeting on 21^st-22^nd March – having been previously betting on a quarter-point rise. Powell’s hawkish tone was in tune with those of Christine Lagarde, president of the European Central Bank, who warned that further action was needed to tackle the inflation “monster”. Markets now expect European rates to rise from 2.5% to above 4%.

Unsurprisingly, stocks fell in response to Powell’s comments and the dollar hit multi-month highs, while US and German short-term bond yields broached their highest levels since at least 2008.

SVB shutdown causes ripple effect

So far so good in markets – but the relative calm was soon shattered on Thursday, in the wake of a dramatic sell-off in US banking stocks, which flowed into Europe and Asia on Friday.

This global rout in bank stocks was triggered by Silicon Valley Bank (SVB), a key lender to technology start-ups. The bank’s shares plummeted by more than 60% after it announced a $2.25 billion share sale to help shore up its finances. The action was prompted after SVB lost $1.8 billion when it offloaded a portfolio of assets, mainly US Treasuries. In the wider market, this led to worries about the value of bonds held by banks as rising interest rates made those bonds less valuable.

Late on Friday came news that US regulators had shut down SVB and taken control of customer deposits, signalling the largest failure of a US bank since 2008.

Gary Kirk of TwentyFour Asset Management believes SVB’s plight is an idiosyncratic regional event, and that the reported adverse effects on European lenders have been exaggerated. He highlights that European banks are less exposed to tech and crypto lending and tend to hold short-dated government bonds, reducing the risk of significant losses due to a forced sale. Additionally, European banks are typically better capitalised and better regulated than US counterparts. He commented:

“We expect this to be short-lived as investors begin to appreciate that with higher rates, the real benefit is stronger net interest margins actually strengthening the balance sheet. However, we would not be surprised to see more news stories like the SVB one coming from the US in the coming days.”

The slide underlined the edginess across markets ahead of the key US employment report on Friday. Prior to that came news on Thursday that US jobless claims had seen their largest increase in five months and that planned layoffs had jumped. Any signs of a weakening labour market are good news for the Federal Reserve as it seeks to quell inflation.

However, confirmation that the US economy added a further 311,000 jobs in February – surpassing expectations – suggested that January’s surge in hiring was not a one-time occurrence and solidified the view that the Federal Reserve will raise rates for longer.

The S&P 500 index slid 4.77% over the week but remains in marginal positive territory for the year to date.

Wealth Check

We know there’s a strong link between financial health and our overall sense of well-being, so the findings of a recent survey were concerning to see. The latest Financial Health Index, published by St. James’s Place,¹ suggested that people are not sufficiently engaging with their finances.

The UK-wide survey revealed that only a third (34%) of adults have a financial plan, falling from 38% last year. This is a worrying statistic, as having a financial plan for the future – such as aiming to increase savings or payments into a pension or buy a property – is key to good financial health.

Another key discovery of the survey was that there’s a huge north-south gap in the financial health of the UK, which has widened over the past year. Financial health is used as an assessment of a person’s overall well-being, including how comfortable and resilient they are to pressures on their finances.

When thinking about such matters, it’s important to understand the difference between actual wealth and financial health. Alexandra Loydon, Director of Partner Engagement and Consultancy at SJP, explains:

“You can have wealth, but you might not necessarily have financial health. The way people manage their lives, and whether they have a financial plan in place, will determine whether they feel they’re financially healthy.”

Alexandra asserts that seeking financial advice helps increase financial well-being by improving financial confidence and resilience. She cites the previous Financial Health Index (for 2021), which showed that, of those people who had a financial plan in place, more than three-quarters (78%) said it made them feel more confident about their financial status.

But to increase the overall level of financial planning, it’s vital that financial education is improved. She argues:

“People have to understand why they need a financial plan – and that comes down to education.

“Our primary hope is that the results of the Financial Health Index will prompt people to look at their finances and take action, by creating a financial plan that suits their circumstances and seeking financial advice where appropriate.”

Alexandra concluded:

“Our message is that you need to be on top of your finances; you need to be planning for your future. It’s such an important element of your overall well-being to ensure that you have a financial plan in place.”

Source:

¹ Financial Health Index Report 2022, St. James’s Place, November 2022. The 2022 Financial Health Index report includes research conducted for St. James’s Place by Cebr in November 2022. For the full methodology of how Index scores are calculated, see page 34 of the report. It also incorporates the results of an Opinium survey of 4,000 UK adults conducted between 17^th and 21^st October 2022.

In The Picture

Even as overall wealth increases across some regions, our Financial Health Index shows that more than half of UK adults do not feel financially resilient.

Our Financial Health Index Report 2022 includes research conducted for St. James’s Place by Cebr in November 2022. For the full methodology of how Index scores are calculated, see page 34 of the report. It also incorporates the results of an Opinium survey of 4,000 UK adults conducted between 17^th and 21^st October 2022.

The Last Word

“During the financial crisis, there were investors and owners of systemic large banks that were bailed out. The reforms that have been put in place means that we’re not going to do that again. But we are concerned about depositors and are focused on trying to meet their needs.”

– US Treasury Secretary Janet Yellen rules out providing Silicon Valley Bank with a bailout.

Schroders and TwentyFour Asset Management are fund managers for St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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SJP Approved 13/03/2023