Boom or bust? 3 important things that could affect your finances in 2023

Boom or bust? 3 important things that could affect your finances in 2023

It would be fair to say that 2022 had its fair share of economic twists and turns. It was the year of the ongoing Covid pandemic, surging energy prices, soaring inflation and the start of the war in Ukraine. Then there was Liz Truss’s and Kwasi Kwarteng’s “mini budget”, which according to the Guardian, cost Britain an eye watering £30 billion.

Official data from the Office for National Statistics showed that UK inflation reached 11.1% in October 2022, its highest level for 41 years, although it had then dropped to 10.1% by January 2023. As a result of skyrocketing inflation, the Bank of England (BoE) increased its rate nine times in a row, finishing at 3.5% in December.

So, against this backdrop, you may be wondering what 2023 has in store for your money? Read on to learn about three things that could happen and how a financial planner could help.

1. The UK could fall into a recession

At the very start of 2023, the Guardian reported that the International Monetary Fund (IMF) predicted that a third of the world’s economies would plunge into a recession. Then, in February, the IMF amended its predictions for the better, suggesting that a recession may be averted after all.

While this means many nations can breathe a sigh of relief, the UK may not be one of them. According to media reports, while the IMF that believes a world recession may not now happen, it also believes the UK may still fall into one, making Britain the only G7 economy forecast to shrink in 2023.

According to the Independent, the BoE also believes Britain could be heading for a recession. This is despite official figures showing that Britain enjoyed economic growth in October and November 2022.

There may be some good news though, as England’s central bank also predicts that the recession is likely to be much shallower and shorter than many feared it would be. If the UK does fall into a recession, working with a financial planner could be a very shrewd move, as they could help ensure that your wealth survives it.

One way they could do this is by helping you develop an adequate financial safety net, which could help you maintain your lifestyle even if a recession affects you.

2. Inflation could fall

According to the BoE, a fall in the price of energy and imported goods during 2023 could result in inflation – which measures the rising cost of living – dropping significantly. It predicts inflation could fall from the middle of the year and reduce to around 4% by December 2023.

While this may be welcome, it’s worth remembering that another reason for the predicted reduction is that the UK could fall into a recession. This is likely to result in a downturn in consumer spending, which is a key driver of inflation.

Historically, high inflation has resulted in interest rates going up, something we saw in 2022. This also means that if inflation does fall in 2023, interest rates may follow, although this is unlikely to happen in the short-term.

Despite inflation falling at the end of 2022, the BoE increased its rate from 3.5% to 4% in February 2023, in an attempt to reduce inflation as quickly as possible. If you have savings, further interest rate rises may sound like good news.

Yet according to the Times, the top rates of savings accounts being offered by banks haven’t kept pace with the BoE’s increases. This means that if inflation does fall to 4% the interest that you’re earning may still not keep pace with it, which in turn, could result in your wealth reducing in value in real terms.

As the stock market has tended to provide better returns than cash, you might want to consider investing your money to inflation-proof it. According to Schroders, between the start of 1952 and the end of May 2022, UK equities returned 11.7% a year on average. Cash returned 6% a year. Always remember that past performance is no guarantee of future performance.

3. The stock market may be volatile

The spectre of a recession in the UK, high interest rates, the ongoing war in Ukraine and plenty of unknowns around the global economy could mean the stock market remains uncertain in 2023. This could result in your investments experiencing a downturn.

While investors should always be prepared for short-term downturns, they can still be unnerving when they happen. More often than not, the better strategy is to keep calm and remain invested for the long haul.

This is because selling your shares to limit potential losses could deprive your money of any chance of recovery when the market bounces back. To demonstrate this, you may want to consider the following illustration, which shows the FTSE 100 between January 2013 and January 2023.

The index tracks the performance of the top 100 companies registered on the London Stock Exchange.

Source: London Stock Exchange

As you can see, while the index increased in value during the 10-year period, it also saw significant downturns along the way. If you had sold your stocks during these periods, your money would have missed the opportunity to recover when the market later bounced back.

As a financial planner we can help you understand what is happening with the stock market and what your options might be. This could help you avoid a decision that you later regret.

Get in touch

If you would like to discuss how to ensure your wealth survives whatever 2023 has in store for it, please call us on 0800 434 6337. We would be happy to help.

Please note:

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investments (and any income from them) 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. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.