Market Report – UK only major economy to contract this year
- IMF upgrades global growth forecasts but predicts UK will shrink
- China Official Manufacturing PMI beats estimates
- Investor nerves increase ahead of interest rate decisions
- Pets at Home shrugs off cost-of-living woes with record number of consumers
Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown: “The IMF now expects the UK economy to shrink by 0.6% this year, which is a stark downgrade from previous expectations. This is a direct contrast to other major economies who have seen their outlooks upgraded because of resilient consumer demand. The UK is facing some specific problems, including its over-exposure to high energy retail prices, which are weighing on household budgets. The UK also has a significant labour problem, which was initially caused by Brexit but has been made worse by a shrinking workforce since the pandemic. Mortgage rates are also prohibitively high in the UK which adds further pressure to the economy because it limits how much money people will spend on non-essentials. Ultimately, the UK has a productivity and demand problem, which when put together creates a very difficult environment. There’s a chance the UK could muster a better performance than the IMF is predicting, given upgrades to expectations from other bodies in recent months. The market will remain very sensitive to interest rate and inflation readings until we have a clear path out of the stagnation.
China’s manufacturing activity has come in better than expected. PMI unexpectedly increased to 50.1 in January, from 47.0 last month, which is the first expansion in the sector since September last year. Unemployment is also improving and delivery times are getting shorter, which is good news for supply chains and ultimately inflation. The mood surrounding China is certainly brighter, as the government has shifted to prioritise economic growth, including large stimulus packages. The reopening of its borders also means hopes are high for a strong rebound, and the forecast for China’s gross domestic product in 2023 to has been upgraded to 5.4% from a previous outlook of 5%. While a recovery in activity is slated to be better than expected, Asian equities are still showing signs of nervousness as investors digest the reality of interest rate hikes later this week.
US stock futures are heading upwards and overall, Wall Street’s expected to end January on a high note, as easing inflation, a cooling of the economy, China’s reopening and corporate earnings all pleased the market. However, on a short-term basis, the US’ main indices are also buckling under the pressure of the Federal Reserve’s upcoming rate rise. Policymakers are largely expected to increase rates by 25bps, and this is what the market has priced in. As the decision draws closer, there are inevitability some small tremors creeping in, but these shouldn’t be protracted.
Pets at Home has managed to shrug off the cost-of-living crisis as UK pet owners flock to its stores in droves. Consumer revenue rose 9% in the group’s third quarter, and are up over 30% compared to pre-pandemic levels. Pets at Home now expects full year profits towards the upper end of the current consensus range of £126-136m, ahead of previous guidance of c£131m. It’s likely the group is seeing customers spend less on higher margin goods like pet accessories, and a shift to less lucrative food and essentials, but overall this isn’t holding the group back. After all, only certain things in life are guaranteed: death, taxes and feeding your dog.”
