Speaking at last month’s ACT Treasury Forum, HSBC global economist James Pomeroy set out a possible economic scenario in the UK for 2023. Observing that consumers were still spending towards the end of 2022 despite low economic confidence, and that the economy was “still turning” amid high inflation and rising interest rates, Pomeroy said there were “glimmers of optimism”.
According to Pomeroy, the economy was “booming” in some areas, such as sports, leisure and tourism, and that high-income households were in a comfortable position, having built up savings during pandemic lockdowns.
However, he explained that the chances of the economy hitting a speed bump were growing. “The economy is defying all logic,” he said, adding that headwinds were building.
The key question for Pomeroy was whether the illogical environment could continue into 2023. He observed that since the financial crisis in 2008, banks were more resilient and that credit was of a better quality. He expected prices in the housing market to fall, but noted that in the UK, 2021 saw more people take out mortgages than ever before.
This, he believed, could cause a problem. “The UK has an obsession with two-year fixed mortgages, two years on, and look what has happened to interest rates – a lot of households in the UK are going to get stuck with several hundred pounds more on their mortgage a month. This, combined with increasing rental costs, will hurt consumers", he said.
But it was the reopening of China that made Pomeroy optimistic. “For the last couple of years, China has been a problem for the global economy. It is the world’s second largest economy and the most important driver of growth, and it was locked down,” he stated. “But it is now reopening far quicker than anyone expected.”
“So, there are two big stories – the West is continuing to spend, and China is coming back.”
One of the biggest risks to this scenario, however, was the labour market. “The last two years have seen the strongest labour markets ever – you were less likely to lose your job, and it had never been easier to find another job. But, we are seeing some signs that the labour market is beginning to cool down.
“The question is: how does it cool?” he asked, adding “If it starts to soften and confidence begins to deteriorate, I will start to become more pessimistic.”
But he believed that a bigger story was the reversal of pandemic shocks. “Supply chains have been fixed. Shipping rate increases in 2021 have been unwound, but at a pace no-one thought was possible – shipping rates have now fallen 90%,” he reported. “Businesses now do not have to pay so much for their goods to be delivered, and this has improved competition, while at the same time, those business that over-ordered last year in order to secure places on the ships have now all got their goods, which again is good for competition. This triple whammy will lead to a period of deflation, and it is coming to a country near you very soon.
“If you are thinking about buying any large items, just keep waiting, as you will soon get a good deal.”
Philip Smith is editor of The Treasurer