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It may be cold outside, but are there glimmers of spring in the economy?

19 January 2023

By Lizzie Cowell

The markets are notoriously difficult to call. Yet, during my (nearly) two decades in the City, one trend I’ve learnt to rely on is that January generally sees the market cast aside the disillusions and negativity of the year before, and step into the new year with an optimistic spring in its step. 

The 3 January 2023 felt different however and while the markets closed up, 1% up on the first day of trading, the papers were awash with negative headlines and conversations with contacts highlighted that hopes for a renewed surge of IPOs were low, with H2 being touted as presenting a ‘possible’ window for new listings, but the tone was not reassuring. 2022 closed with a barrage of strike action, mounting anxiety around inflation and a major recession, a very new Prime Minister finally in office after months of embarrassing political upheaval and continued energy and supply chain issues. 

Fast forward a fortnight and the gloomy tides seem to be turning and while the temperatures may once again be plummeting outside, there are a few rays of sunshine to chip through the ice and keep us positive this January. And it seems as though they’re doing their bit to warm up the markets, driving the FTSE to close within touching distance of five year highs last week, encouraged by expectations that the American Federal Reserve will not have to raise interest rates much more. Inflation appears to have reached its peak and supply chain and shipping cost issues are stabilising. 

That’s not to say that recession isn’t still yet a threat, reinforced this week as The World Economic Forum kicked off. Two thirds of the 50 chief economists polled on entry to the annual Davos conference expect a recession to hit this year, with 18% warning it was “extremely likely”. But Friday’s UK GDP data showed that the UK economy had not hit recession…yet. Indeed, economists and investors alike were convinced that figures would show Britain on the decline, but rather than the contraction of 0.2% that was expected by economists and investors as they awaited the report with baited breath, data showed that the UK had snuck in 0.1% in November.  

The WEF survey also pointed out that leading economists believe there are “tentative signs of optimism”, predominantly driven by the expectation that the global energy and cost of living crises “will be less severe” by the end of the year. Energy supply sources are diversifying and energy efficiency improving. Last week, January’s strong wind saw the UK produce record wind power generation. Another positive signal to consider is the fact that unlike previous recessions, Britain’s unemployment rate is low, at just 3.7%, and redundancies, however strong a feature they may play in the headlines, remain at very low levels. 

So, while it’s fair to say that the economy is in a precarious position, there are reasons to be optimistic. Indeed, yesterday at Davos, the International Monetary Fund signalled that it would upgrade its forecasts for the global economy. Rather than forecasting a “tougher” 2023, Gita Gopinath, deputy managing director of the fund, now expects an “improvement” in the second half of the year and into 2024. There are some glimmers of hope for a better year than we hoped.