4th April 2023
UK grocery prices soar
If you’re taking part in an Easter egg hunt this year, best move fast – those tasty treats will soon be an even greater indulgence. Kantar’s recent findings revealed a record 17.5% increase in UK grocery prices, attributed to the rising cost of sweets and fizzy drinks. The surge in demand has caused a 7% hike in cocoa prices since February.1
On the healthier side, fruit and vegetable prices have also risen due to issues with availability. In January 2023, the UK imported the smallest amount of vegetables since 2010 (when the population was around 7% smaller), reflecting a challenge for central banks as they grapple with punchy growth and inflation rates while managing banking sector issues.
UK dodges recession in the short term
Although the term ‘punchy’ may not be attributable to the UK’s economic performance, the Office for National Statistics revised their figures to show that GDP actually increased by 0.1% in the last quarter of 2022, having previously said the economy registered no growth. The figures showed that high inflation took a smaller toll on the economy than previously thought, and the revision meant the UK has avoided recession for now.
‘For now’ is the key phrase, as Ruth Gregory of Capital Economics points out:
“With around two-thirds of the drag on real activity from higher rates yet to be felt, we still think the economy will slip into a recession this year.”
Investors reassured by bank stability
With five consecutive days of gains, equity markets enjoyed a relief rally last week. Investors were reassured by the news that concerns over bank stability had abated and there was a growing sense that central banks were nearing the end of their tightening cycle. The rally received a further boost when First Citizens BancShares agreed to purchase the assets and loans of the collapsed US lender, Silicon Valley Bank (SVB).
During his appearance before the Treasury Committee, Bank of England (BoE) Governor Andrew Bailey reassured MPs that recent events had not caused stress to the UK banking system. However, he acknowledged that the BoE remained on “heightened” alert for any potential future disruptions. It was revealed the UK arm of SVB saw a third of its deposits – about £3bn – withdrawn in one day.
UK and Asia confidence on the up
Midweek data from the US showed that consumer confidence unexpectedly rose in March, despite the recent banking crisis. The availability of jobs and low unemployment offset concerns about elevated inflation expectations. The survey suggested that consumption would continue to grow moderately, helping to support the overall economy.
In Asia, Alibaba, the e-commerce giant, revealed plans to divide its $255 billion business into six distinct units, prompting Asian investors to rejoice. As a result, the company’s shares jumped by 17% over the week. The restructuring announcement was made shortly after Jack Ma, the co-founder of Alibaba, returned to mainland China after spending time abroad and keeping a low profile since the Chinese government initiated a rigorous crackdown on the technology sector in late 2020.
Martin Hennecke, Head of Asia Investment Advisory at St. James’s Place, suggested:
“Jack Ma’s reappearance and Alibaba’s overhaul, as well as Premier Li Qiang’s speech on Thursday about being committed to opening up and reforms, could all be indications of central government efforts to achieve healing and get back to business, with a view to achieving a strong economic rebound.”
China’s slower expansion in manufacturing activity in March and the deepening of the slump in industrial firms’ profits during the first two months of 2023 undermined optimism. Nevertheless, the services sector saw the fastest expansion in nearly 12 years following the conclusion of China’s zero-Covid policy in December.
Inflation ups and downs
In March, the eurozone experienced its largest drop in inflation on record, decreasing to 6.9% from February’s 8.5%. However, core inflation, which excludes food and energy prices, increased to a historic high of 7.5%, bolstering the argument for further interest rate hikes by the European Central Bank.
Consumer spending declines in France and German retail sales, the two largest economies in the eurozone, indicated a slowdown in consumers’ spending ability, which is the primary driver of price growth.
Similarly, the United States’ preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, decreased to 5.0% in March from 5.3% the previous month, easing the pressure on the Federal Reserve to continue with its rate-hiking campaign. As a result, money markets are now pricing a higher-than-even chance that the Fed will not raise rates at its 2–3 May policy meeting.
As the first quarter came to a close, global equities consolidated a 6% year-to-date gain, and government bonds rose 3–5%, registering their best month since 2008, bringing some end-of-quarter optimism. The bank turmoil served as a catalyst for tech and other growth sectors to reassume market leadership, highlighting the importance of a diversified portfolio approach.
1 Battle for shoppers heats up as grocery price inflation hits new high, Kantar, 28/03/2023.