2023 January Economic Review

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  • Global stock markets delivered a largely flat performance over the past three months, with the positive momentum seen at the end of 2022 being offset by renewed concerns about further interest rate hikes.
  • The UK inflation rate continued to fall, but remained close to 40-year highs
  • Unseasonably warm weather in the UK and Europe caused wholesale gas prices to tumble, raising expectations that energy bills would fall

As 2022 wound down and we celebrated the start of a new year, there were signs that inflation in many parts of the world, including the UK, Europe, and US, had reached a peak and was beginning to fall. After falling for most of the year, global stock markets began to rise again in October and November, but this came to a halt in December as investors became concerned about further interest rate hikes, slower economic growth and the possibility of a worldwide recession.

Economic update

The run-up to Christmas is generally a strong period of consumer spending in the UK, but this time round retail sales volumes fell by 1% in December due to the cost-of-living crisis taking its toll. With inflation running at more than 10% and energy bills almost tripling, it is believed that many consumers cut back on Christmas shopping as they prioritised their spending.

The good news, however, was that the inflation rate fell for the second month in a row in December, down to 10.5% from 10.7% in November and 11.1% in October. A key driver of this drop was falling prices for fuel and clothing, while prices for food and drink moved in the other direction, increasing at a faster rate than the overall inflation rate. Energy costs, in particular, have tumbled as unseasonably warm weather has resulted in lower demand for gas to heat homes.

Despite the potentially good news, there is evidence that the UK economy is weakening. Manufacturing activity has been weak for some time and continued to fall over the past three months, while the services sector, which includes retail, transportation and financial companies, also saw slowing activity. Against this backdrop, the Office for National Statistics revised its estimate for gross domestic product growth, which measures the size and health of the economy, for the three months to September and found that it contracted by 0.3%. The expectation is for another contraction in the final three months of the year given that spending fell as prices went up.

The UK’s financial markets were much quieter over the past three months as they recovered from the bout of volatility brought on by the large fiscal stimulus package announced by the former prime minister and chancellor of the exchequer in their September ‘mini budget’. As a former chancellor, Rishi Sunak’s appointment as prime minister in late October went some way to calm markets, while new chancellor Jeremy Hunt reversed many of the proposals in the mini budgets and used the Autumn Statement to set a more fiscally prudent tone.

In Europe, inflation fell to 9.2% in December, from 10.1% the month before. An uncharacteristically warm winter was good news for consumers because it reduced the need to turn up thermostats to heat homes, but on the flip side it also meant ski hills across the Alps had to close temporarily because of bare slopes. While Europe’s economy has shown weakness recently, with overall business sentiment being negative and activity slowing down, there was some good news as the unemployment rate remained stable in November and industrial production increased more than expected.

Market commentary

Global equity (shares) and bond markets were mixed over the past three months. Equity markets began to rise in the second half of October and recorded strong performance until mid-December, when renewed concerns about inflation, interest rate hikes and rising Covid-19 infections in China pushed them downward again. Asia Pacific, Europe, the emerging markets and the UK delivered good performance, while North America was more turbulent.

Stock markets started to rise again at the start of the new year, but more recently have deteriorated once again on concerns about a coming recession, especially as major technology companies such as Amazon, Google and Microsoft have announced thousands of job cuts as they face falling revenues.

Bond markets closed 2022 having experienced a series of interest rate hikes that pushed up yields on benchmark government bonds, which meant their prices fell. The US Federal Reserve hiked rates twice during the final three months of the year, finishing at 4.5%. The Bank of England announced two rate hikes, bringing the UK interest rate to 3.5%.


With the annus horribilis of 2022 behind us, we believe a cautious approach is still necessary for the months ahead. Inflation remains high, economic conditions are weakening and central banks may continue to raise interest rates if consumer prices continue to rise. Along with these factors, there are other concerns entering our field of view: economies are weakening, businesses are beginning to cut jobs and a recession is a real possibility. This is not to mention the ongoing war in Ukraine, spiking Covid-19 infections in China and the ongoing supply chain constraints as a result.

It is very likely that we will see more interest rate hikes in the first half of 2023 until the Bank of England and other central banks are confident that inflation is under control. This, along with the negative outlook for the economy, means we could see further market volatility in the near term, and therefore we do not believe now is a time to take unnecessary risk.

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26 Jan 2024

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