20/03/2025

Investment market update: February 2023

Statistics suggest that some of the pressures facing economies, such as high inflation and recession concerns, are starting to ease. However, there is still a risk that economies could fall into a recession in 2023. Read on to find out what influenced the markets in February 2023.

As an investor, remember to focus on your long-term goals when making decisions. Volatility is part of investing, and you should ensure that any investment matches your risk profile.

UK

Official figures for the end of 2022 meant the year started with some good news – the UK narrowly avoided a recession.

GDP in December declined by 0.5%, but this was offset by gains in the previous two months. A technical recession means an economy has contracted for two consecutive quarters. As the UK economy contracted in the third quarter of 2022, there was a recession risk. Investors should still be prepared for volatility though, as economists are predicting a recession this year.

The Bank of England (BoE) also believes the UK will face a recession, although it expects it to be shallower and shorter than previously forecast. The BoE predicts economic output will fall, from peak to trough, by less than 1%. This compares to more than 6% during the 2008 financial crisis and 3% during the 1990 recession.

After a year of high inflation, it is starting to ease and fell to 10.1% in January. The figure is still much higher than the BoE’s 2% target, so it’s not surprising the central bank increased the base interest rate to tackle the rising cost of living.

The BoE’s Monetary Policy Committee voted to increase rates from 3.5% to 4% – a 14-year high – and cautiously said it believed the peak of inflation was now behind us.

One of the key factors continuing to drive inflation is high energy prices. So, energy firms announcing huge profits has led to criticism and calls for further windfall taxes. In February:

• Oil giant Shell reported earnings of almost $40 billion (£33.2 billion).
• BP posted record profits of almost $28 billion (£23.2 billion).
• The owner of British Gas, Centrica, reported its profits tripled to more than £3 billion.

The cost of living crisis has led to nationwide industrial action. The Office for National Statistics found that more than 840,000 working days were lost due to strike action in December. During February professionals from teachers to Border Force staff participated in strikes.

There could be some good news for workers struggling because of the rising cost of living. Research from the Chartered Institute of Personnel Development found that 55% of recruiters plan to lift pay this year to improve staff retention and hiring.

Data suggests that many businesses are still facing challenges:

• The S&P purchasing managers’ index (PMI) for the manufacturing sector found it has contracted in the six consecutive months to January. However, the pace of the downturn slowed when compared to December.
• The UK service sector suffered its worst month in terms of output in two years as both consumers and businesses cut back their spending.
• Figures from the Insolvency Service show insolvencies jumped 7% year-on-year in January. When compared to the start of 2020, just before the pandemic hit, insolvencies are 11% higher.

Despite reports showing there are still obstacles ahead, the FTSE 100 reached record highs during the month. At the start of the month, it surpassed the previous record set in May 2018, which was then beaten several times during the next few weeks.

Europe

Similar to the UK, the European economy narrowly avoided a technical recession at the end of 2022. The European Commission (EC) expects the final growth figure for 2022 to be 3.5%.

An S&P Global report also indicates the eurozone economy grew for the first time since June 2022 in January. The reading lends weight to the hope the bloc could avoid a recession as companies report higher levels of business activity.

Looking to the year ahead, the EC expects Ireland to lead the recovery. The country is forecast to grow by 4.9% in 2023 following last year’s estimated annual growth of 12.2%, which made it the fastest-growing economy in Europe.

In contrast, Germany, which is often deemed the powerhouse of the EU, could face challenges. Signs suggest the country could fall into a recession after industrial output fell by 3.9% in December. This fall is linked to high energy prices, with output from energy-intensive industries falling by 6.1%.

Inflation remains a key challenge in the eurozone, but, again, it is easing.

In January inflation was 8.5%, down from 9.2% a month earlier, according to Eurostat. High energy costs, which increased by 17.2%, are still driving the rate of inflation.

After increasing interest rates by 50 basis points, the European Central Bank said it will “stay the course in raising interest rates significantly at a steady pace”. So, households and businesses should expect further rises throughout 2023.

US

The US also beat recession fears after GDP increased by 2.9% in the final quarter of 2022.

However, the PMI data indicates businesses are still facing headwinds. Output declined at the start of 2023, driven by a sharp contraction in new orders and subdued sales from both domestic and export markets.

Despite this, job figures indicate businesses are feeling optimistic. The US job market added 517,000 jobs in January, far surpassing the 185,000 economists predicted.

Like Europe, inflation is slowing in the US. The cost of living increased by 6.4% in January.

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 investment 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.