Investment Markets Update: January 2022

The first month of the brand new year is over, having seen cold, Russian tension, and, for many of us, a serious addiction to a game called Wordle. But what has been happening in investment markets and the economy?

While many countries have now eased Covid-19 restrictions, the knock-on effects of lockdown continue to affect economies, businesses, and households.

According to the Organisation for Economic Co-operation and Development (OECD), inflation in the 38 richest countries has reached 5.8% – a 25-year high. The findings also highlight the driving forces behind inflation rates. Year-on-year inflation is a more modest 3.8%, if food and energy are excluded.

Global demand for gas and oil, along with rising carbon prices, means that energy bills for businesses and families are increasing. In the UK, rapidly rising prices have led to more than 20 energy firms collapsing. Other countries are facing similar challenges. According to a report from Bloomberg, households in Europe could see average energy prices increase by up to 54% when compared to bills two years ago.

The United Nations (UN) also reported that world food prices have surged by 28% and affected all major food groups. The price increase has been linked to strong demand, supply chain issues, poor weather, and rising operational costs.

Inflation and linked price rises can be concerning, we know. We are happy to discuss any concerns arising from this summary. As ever, we remain confident that the strategies we employ for our clients mean they will be able to successfully navigate the future uncertainty.

UK Economy & Investment Markets

Covid-19

In December, the Omicron variant of Covid-19 began to spread in the UK. This led to prime minister Boris Johnson announcing “Plan B”, which reintroduced some of the restrictions and guidelines previously lifted, such as wearing face masks and encouraging employees to work from home where possible.

The decision affected service sector growth, which fell to a 10-month low. According to IHS Markit Purchasing Managers’ Index (PMI) data, the reading fell from 58.5 in November to 53.6 in December. A figure above 50 indicates growth, but the latest update suggests the pace is slowing.

Brexit & Businesses

It’s not just Covid-19 that is affecting businesses in the UK; the effects of Brexit are playing a role too.

According to a snapshot from the Chartered Institute of Procurement and Supply (CIPS), UK factory output was limited at the end of 2021 due to Covid restrictions. Brexit also pushed up costs. Research from Euler Hermes also supports this: the credit insurance lender states that Britain’s exporters are on track to be the slowest among big European economies to recover from the effects of the pandemic.

UK factories are therefore set to increase prices at the fastest rate since 1977. The CBI’s industrial trends survey found that 66% of firms expect to hike domestic prices in the first quarter of 2022 amid a skills shortage.

Inflation

Retail figures released from the Christmas period paint a gloomy picture. Retail sales across the UK fell by 3.7% in December, which could severely affect businesses that rely on a busy trading period over the festive season. Adding to these woes, a consumer confidence index from GfK suggests that people are less optimistic about their financial position and the wider economy, which could lead to subdued spending.

Rising inflation is likely to be one of the factors affecting consumer confidence. Data from the Office for National Statistics show that wage growth has fallen below inflation. Average basic pay, which does not include bonuses, increased by 3.8% between September and November 2021. Considering inflation of 5.1%, this means a real-terms loss.

Housing & Manufacturing

Moving on to the housing market, homeowners have benefited from prices surging. In 2021, the average house price increased by 9.8%. Housebuilders benefit from rising prices; however, the sector faces challenges. Shares in UK housebuilders fell after the government ordered the industry to pay £4 billion to help remove dangerous cladding from buildings following the Grenfell disaster in 2017.

Car sales also continue to lag behind previous figures, despite the economy reopening. Annual sales data from the Society of Motor Manufacturers and Traders found that car sales increased by just 1% year-on-year in 2021 and remain almost a third below the total sales for 2019. Electric vehicle figures do provide some good news though. Britons bought more electric cars in 2021 than in the previous five years combined.

European Economies & Investment Markets

In contrast to car sales figures from the UK, German carmaker BMW has reported record sales of more than 2.2 million in 2021, despite global chip shortages.

While the above and unemployment figures are positive for Germany, official data shows that the economy shrank by 0.7% between October and December 2021. As the biggest economy in the eurozone, Germany is often used as a bellwether for the economic area. However, in spite of this, France, Spain, and Italy posted growth for the final quarter of 2021.

IHS Markit data suggests that the private sector across the EU is experiencing a slowdown, although it’s still in growth territory.

US Economy

Data and news from the US are similar to the UK.

Inflation in the US hit 7% in January, the highest level since 1982. This has had a knock-on effect on consumer confidence. Research from the Conference Board suggests that Americans are growing less optimistic about short-term prospects.

This sentiment is likely to have affected consumer spending too. Retail sales in the US were less than expected and fell by 1.9% in December. Removing cars and gasoline from the calculation causes spending to fall to 2.5%. Again, this means spending fell during the crucial festive period and could place businesses under pressure.

However, findings suggest that US businesses remain optimistic. Payroll processing firm ADP said US companies hired twice as many people as expected in December, signalling they are confident about the economy.

Thank you for reading. We hope this summary of investment markets and economies has been informative. If there are any aspects of this post that you would like to discuss, please do contact us.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.