|
Last year 2022 was not good for any economy in the world in general, but there are some that were much more affected than others. In particular, investment in British shares and its own currency, the pound sterling, saw frenetic declines in their valuations. We previously told you in another article three reasons not to give up investing in British shares. And it seems that those at Morgan Stanley have gotten wet with the issue; They have made a list of possible scenarios that could occur in 2023, including that the United Kingdom economy recovers and drives a rebound in the pound sterling. Let's see how investing in British shares can fare this year in that case...
What is the state of investment in British shares?
Well, the truth is, he is not in his best moment. It approximately entered into recession in the third quarter of 2022. This has occurred due to the frantic fight against the unbridled growth of inflation by the Bank of England (BoE), where nine interest rate increases have been carried out until date.
Eight of the G10 economies along with their GDP growth expectations for 2023. Sources: Bloomberg/Morgan Stanley Research.
Therefore, the idea that investment in British shares will return to the bullish path is unlikely. Economists at Morgan Stanley predict that the British economy will be at the bottom of growth among advanced economies. They are based on high energy prices, the Government's plans to limit borrowing and interest rate increases by the Bank of England.
What could happen to change things?
1. Energy prices could continue to fall.
Inflation in the United Kingdom economy seems to have not yet given a break, standing at over 10,7% last November. These levels have been fueled by sharp increases in energy costs, which have resulted in a drop in consumer spending. If energy prices fell further and did not rise again, it would ease the cost of living, give a big boost to stock investing and leave consumers more money to spend on essential goods and consumption.
On the part of the United Kingdom Government, they established a price cap that will be extended until April 2024, which would improve the financial situation of the economy. At least there has been a decrease in energy prices, such as the price of natural gas. In the United Kingdom it has fallen 72% from its August peak, but the war between Russia and Ukraine makes future prices unpredictable.
2. The number of workers could grow.
Surprisingly, UK inflation has been largely fueled by a lack of labor across the country. Companies compete for the hiring of personnel, offering higher salaries. This ends up falling on consumers due to the higher salary costs involved in hiring staff. Morgan Stanley economists say the UK's labor participation rate has been hit by the effects of Covid.
Other factors such as waiting times in the UK health system and the flight of foreign workers after Brexit have had a significant influence on this sector. According to Morgan Stanley economists, this labor shortage could be solved by providing more funds to the National Health System to eliminate its delays with patients. At the same time, they recommend job reintegration programs for younger people and a relaxation of immigration rules and a softer Brexit to facilitate an increase in labor supply.
3. Consumers may start spending again.
It seems that the British have buckled down with a vengeance. They currently have savings valued at 200.000 million pounds (243.000 million dollars at the exchange rate). Without counting the monthly deposit receipts; They remain above the monthly average before the coronavirus crisis.
If consumers gain enough confidence and start spending more freely from their savings, the economy could get a nice boost. Although Morgan Stanley economists doubt that is the case, more like a possibility, it would certainly help maintain more resilient growth throughout this year.
Can the political situation in the United Kingdom influence these scenarios?️
A lot of uncertainty can be seen. Just this week, the pound strengthened after the European Union and the United Kingdom reached an agreement to use the United Kingdom's live database to track the flow of goods between Great Britain and Northern Ireland. The agreement, which resolves a Brexit-related sticking point, will likely help reduce customs paperwork and could lead to possible progress in other areas of dispute. And that could be even better for the pound.
But there is also the prospect of a referendum in scotland later this year, with the country planning a vote on whether to leave the UK. To put you in context, Scotland represents around 7,5% of the UK economy. The Scottish Government has called for a vote in October, but will first require approval from the UK Prime Minister to proceed. And with this Government it does not seem that they are going to achieve it. This is another risk to consider, given that the pound lost around 6,5% of its value against the dollar in the run-up to the 2014 referendum vote.