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Highlights
- Inflation is expected to fall below 5% by the end of next year, but interest rates may go further up and hit 4.5% by May 2023.
- By 2023, mortgage rates in the UK are expected to fall further to approximately 5% or even less.
- The £400 discount enjoyed by most domestic consumers since October would end in March 2023.
2022 has been harsh on the UK, with the country’s economy contracting more than expected. The fears of a long recession have been rising in the country over the past months while the inflation levels have skyrocketed, and growth has taken a hit. Trade tensions and supply chain constraints have been increased due to the Russia-Ukraine war, further deteriorating the country’s cost-of-living crisis. Taking the developments of 2022 into account, let’s look at three market trends for 2023.
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Interest rate outlook
A crucial factor that investors should keep an eye on in 2023 is the interest rate. On December 15, the interest rate increased and reached 3.5%. This was the ninth time over the year that the Bank of England raised the rate. Interest rates have been going up to curb the skyrocketing inflation, which stands at a record-high level of 10.7%.
Nevertheless, inflation is expected to fall below 5% by the end of 2023, as energy prices may not go up as swiftly next year, supply chain problems would be potentially reduced, and the already high-interest rates would curb the overall demand. But as recession comes, interest rates may go further up and hit 4.5% by next May. Before reviving in 2024, the UK economy may contract by over 1% next year.
Property Market
After experiencing a boom in the pandemic, the UK’s property market has started cooling off. As inflation has risen, the Bank of England has been raising interest rates, increasing borrowing costs. The anticipated long recession, high borrowing costs, and termination of the Help to Buy scheme would potentially curb the overall market activity and demand.
Another trend in the housing market is the expected fall in mortgage rates. The ‘Truss premium’ has been eliminated from several lenders’ products since Rishi Sunak took over as the PM, and the slight steadiness in the market has led to a fall in mortgage rates. By 2023, the rates are expected to fall to approximately 5% or even less.
Energy market
Over the past year, households have faced a lot of troubles due to the rising energy bills amid the spiralling cost of living crunch. In April this year, the average energy bills reached about £2,000 per year, and they were expected to rise further and cross £3,500. However, the government launched the energy price guarantee (EPG) in October, which put a lid on the average energy bills at about £2,500 per year.
Unfortunately, energy prices don’t appear to be normalizing by next year. In May 2023, this energy price cap is expected to rise to £3,000. The £400 discount enjoyed by most domestic consumers since October would end in March 2023. Therefore, early next year, the discount would end, and the price guarantee would rise so consumers would face considerably higher energy bills from April.
Bottomline
2023 is expected to be a rough year for the UK as the economy is on the verge of a prolonged recession, or it may already be in it. The real incomes of households would be crushed further amid soaring interest rates and spiralling inflation. As spending falls, sectors like hospitality and retail will be hit the hardest. Inflation would potentially slow down over the year, but it would continue to be high, and the labour market may loosen up, but not much.
