From the 3^rd of March we can expect a 4.9% increase in the price of rail fares across the UK.

This has been capped by the Department for Transport (DfT) to try and keep the prices as fair as they can. The increase in ‘regulated’ rail fares is linked to the annual July retail prices index (RPI) measure of Inflation, which was 9% in 2023.

Millions of commuters will feel the hit of this price increase in their everyday life and with mass cancellations and delays some are calling this an insult to the public.

The Trades Union Congress (TUC) called the rise "excessive" given "widespread cancellations and delays" across the network and called for rail to be brought back into public ownership.

Privatisation of British Rail

The ownership and operation of the railways in Britain were passed from government control into private hands, this process began in 1994 and was completed in 1997.

Now, Railway companies and stations are owned by various private companies.

What are Regulated rail fares?

Any train tickets you buy which are regulated will be affected by the increase of 4.9%.

• Season Tickets
• Anytime Day
• Off-peak
• Super Off-Peak

What are unregulated Rail Fares?

If you buy these tickets they will not be affected by the upcoming price increases.

• First-class
• Advance
• Anytime
• Off-peak Day

• You should talk to your lender

If your fixed rate term is coming to and end in 2024 you could be affected by the rising interest rates. You will have to remortgage or you will be placed on your lender’s standard variable rate which is often expensive. When you remortgage the interest rate will now be higher for the new term.

If you are unsure about what’s to come with the rising rates you should discuss the options with your lender and they should be able to inform you about your existing plan as well as how you can navigate through the changes.

If you want to know why interest rates are rising and if you will be affected you can find out here. 

• Review your finances

With your monthly payments increasing you should make sure you can financially support the new bill. You may have to figure out where to cut costs so you can make the new payments, or there may be alternative plans you can take on.

• Compare other mortgages

Once you have determined what your mortgage lender is offering for your new term it is important to figure out what else is out there. Banks will have various offers and rates so choosing the right one for your situation is vital.

It may be helpful to seek out a financial advisor as they will be able to give you choices from across the market and advise you on the best for your personal situation. This could make the process a lot less stressful for you.

• Take out a short term loan

If you decide to take on another fixed term loan then consider only choosing a two year plan so you can review the situation again when it ends to make the best financial choices. If you take out a longer term you could be stuck with high rates even if they fall in the next couple of years.

What are the different types of Mortgages?

The rates are often changing and many predict they will decrease towards the end of 2024 so it could be beneficial to not commit yourself to a lengthy term with the current rates.

We have recently seen lenders hike up the prices for mortgage funds causing millions of people a much higher rate on their mortgage bills with some at a staggering 7%.

The BBC informs us that banks such as HSBC, NatWest and Virgin Money are all increasing the cost of new deals.

Why are mortgage interest rates rising?

Interest rates continually change to help control inflation and ease the cost-of-living crisis.

The Bank of England sets the base rate, currently at 5.25% which is what it costs lenders to borrow the money to then lend out to customers.

If inflation is going up then interest rates will often follow to try and dissuade people from spending and lowering the demand.

Does this affect you?

If your mortgage term is set to expire this year then the higher rates could affect you when you remortgage. An estimated 1.6 million deals will expire in 2024, according to Banking Trade Body UK Finance and these will be affected by the change in interest rates.

Those on a fixed rate mortgage will not be affected as the rate was agreed at the beginning of the term and remains the same throughout.

If you are on a Tracker or standard variable mortgage then your monthly payments could rise substantially.

Find out What the Different Types of Mortgages are.

Ofgem has announced that from April 2024 the energy price cap is going to be reduced to £1,690 per year for a typical household. This will be £238 lower than the cap they set in January 2024 which was, £1928.

The price cap is the maximum amount energy suppliers are able to charge for each unit of energy.

Are you covered by the price cap?

You will be covered if you pay by, Direct debit, Standard credit, repayment meter and Economy 7 Meter.

The price cap covers 29 million households in England, Wales and Scotland stated by the BBC.

The price cap is based on a typical household which pays their bills by direct debit using gas and electricity. However, If you pay every three months by cash and cheque the price cap falling will not affect you and you will be charged more in April 2024.

How Long will this Price cap last?

Every three months Ofgem reviews the price cap and so in June 2024 the price cap could alter again.

Analysts at Cornwall Insight predict the price cap will see a small fall in July and then increase in October

Ofgem

This is the energy regulator for Great Britain which works to uphold energy regulations. They review the situation every three months and set price caps which energy suppliers must follow.

Saving money for the future or for emergencies is becoming increasingly difficult with prices rising and more people living pay check to pay check.

With 65% of people believing that they wouldn’t be able to last just three months without having to borrow money. The financial anxiety across the UK has made it difficult for people to seek advice and support with more people feeling a sense of loss when it comes to saving.

Research found that over 5.2 million people have to pick up a second job in order to afford the cost of living.

Around 61% of adults save money either every or most months.

How much on average do people have in savings?

As of January 2024, a survey from Finder has revealed that the average UK adult has £11,185 in savings. Despite this about 46% of people have £1000 or less in savings and 25% have £200 or less.

With 16% of adults having no savings at all this means around 8.7 million people have very little or no money to fall back on in case of emergencies.

The Financial conduct authority (FCA) state that this is mostly the younger population of 18-24 years olds have less than £1000.

According to Money and Pensions Service (MaPs), around 11.5 million people have less than £100 in their savings account.

Average savings by age group

As of January 2024, Finder reveal how much people have saved based on their age.

Generation X has 19% of people with no savings at all making them the highest amount across all generations to have no savings at all. This shows the younger generations struggling to save or unsure where to start. Those aged 74+ have 10 times more in savings than 18-24 year olds.

The average amount saved increases with age for multiple reasons, a higher salary, different motivations and urgency to save or different lifestyle expenses. As responsibilities pile up there might be a higher pressure to save for a rainy day, for retirement, a pension and to look after family.

How does the Inheritance tax work?

Inheritance tax was first introduced in 1984 and is tax paid on the estate, this includes property, money, and possessions of someone who has passed away. This tax must be paid on anything above the value of the £325,000 threshold. If everything above this threshold is left to a spouse, civil partner, charity, or a community amateur sports club there is no tax required to be paid.

The standard tax rate is 40% on what you inherit over the £325,000 threshold with £7 billion being raised annually through inheritance tax which is then spent on public services.

If the person passing away leaves their home to children or grandchildren the threshold can increase to £500,000 before being taxed.

If your estate is worth less than your threshold and you are married or in a civil partnership when you pass away, any unused threshold can then be added to your partner’s so the tax-free allowance increases for them.

In an interview with Clive Barwell, who has over 50 years of experience in the industry told us invaluable information about IHT, that the best and easiest way to save on IHT is to give your surplus wealth away as gifts.

“At the point of making a cash gift, there are no tax implications for either the Donor or the Donee, regardless of the amount given away. However, for the gift to be fully effective for IHT purposes, the Donor must survive for 7 years from the date of the gift. If they don’t, the value of the gift is added back into the IHT calculation upon death.”

Clive Barwell emphasises the significance of planning ahead and believes that “Failing to plan is planning to fail.”

Why does the Conservative Party want to cut Inheritance tax?

Towards the end of 2023, there was speculation that the conservative government would be getting rid of inheritance tax due to their plans for a 'gear change' on tax. Those in favour at this time were warned of the backlash from the public as this change focused on tax cuts for the rich rather than helping ordinary families in a time of economic uncertainty.

Then on December 27th, 2023, The Telegraph reported that several conservative MPs favoured cutting inheritance tax and the change could happen in the Spring budget.

The conservative party are said to be behind Labour in the polls and looking for ways to boost their numbers. The Independent stated that members of the conservative party believed that this could be a “game changer.”

Who will this benefit?

The Institute for Fiscal Studies notes that 1% of people in the UK would receive almost half of the benefits. Only the wealthiest in the UK will come out of this change with a positive outcome.

As inheritance tax is only paid by 4% of households, that’s 1 in 25 paying this tax.

A YouGov survey tells us that 54% of voters considered the tax ‘very unfair’ or ‘unfair.’ With a high proportion of people feeling the tax is unfair, the Conservative Party feel this gives them an advantage in upcoming elections.

How likely is it to be abandoned?

Although there are rumours that many MPs are in favour of the inheritance tax cut there are also some expressing their distaste for this cut. Jonathan Gullis, former Education Minister has said he would rather see “the higher rate income tax threshold raised, or the basic rate of income tax cut now.”

Additionally, Neil O’Brien, the former Health Minister has said, “People most want to cut taxes that fall on low- to middle-earners and council tax and VAT.” The Guardian brings an Ipsos poll to our attention that showed the public preference for a tax cut was one on low-income tax (44%), followed by 36% hoping for council tax cuts.

It is largely felt that IHT being cut is just a speculation as some conservative members are highlighting other, more pressing matters that are important to the public. The MPs are also aware of the likelihood of backlash with this change causing the delay and second thoughts.

The cutting of inheritance tax could likely become a manifesto pledge rather than a set-in-stone policy.

HOW MUCH MORE PAIN IS THERE TO COME?

Investment Company Managers on Interest Rates, Inflation and Bond Markets

Expert Comment from Chris Clothier, Co-Manager of Capital Gearing Trust, Samantha Fitzpatrick, Fund Manager of Murray International Trust and Andrew Bell, Chief Executive Officer of Witan Investment Trust

With UK inflation coming in above expectations at 8.7%, the likelihood of an interest rate hike from the Bank of England has increased. The Association of Investment Companies (AIC) has gathered comments from investment company managers on the outlook for UK consumers and borrowers, and where they see investment opportunities in the current environment.

Could we be near the peak for interest rates?

Chris Clothier, Co-Manager of Capital Gearing Trust, said: “The market is forecasting a peak rate of just under 6% for Q1 2024. Leading indicators are beginning to show the labour market cooling, and the impact of interest rate rises is starting to be felt on mortgage rates as mortgage holders come to the end of their fixed terms. We expect that this will eventually depress demand which, combined with energy and food inflation moderating, will eventually control inflation.”

Samantha Fitzpatrick, Fund Manager of Murray International Trust, said: “Many central banks, including the Bank of England, have continued with planned interest rate hikes amid volatile markets in an attempt to tame inflation. We are only now seeing the huge knock-on effect on mortgage rates as previous deals are rolling off in significant numbers. This, above all else, may curtail future interest rate hikes here in the UK.”

Andrew Bell, Chief Executive Officer of Witan Investment Trust, said: “In the US, a further nudge higher cannot be ruled out, but the data is likely to make the recent pause look more justified in a month’s time. In Europe and the UK, a further quarter-point rise or two is widely assumed, but it is impossible to be precise because of the lags before higher rates impinge on sentiment. After such a long period of a near-zero cost of borrowing, small steps would be wise. No central bank wants to crash the economy and have to cut rates aggressively next year just to crown the credibility lost from failing to anticipate the surge in inflation with blame for exaggerating its persistence.

“With inflation starting to converge with official targets, greater patience can be exercised than when the gap was widening. So we expect the peak in rates to resemble Table Mountain more than the Matterhorn. It is an unspoken reality that the government debt mountain will have to be eroded by inflation – not the destabilising rates of the past year but likely higher than official 2% targets.”

Is inflation calming down?

Andrew Bell, Chief Executive Officer of Witan Investment Trust, said: “Yes, most obviously in the US, which tightened first and most aggressively, together with a strengthening dollar in 2022. Energy prices there have fallen and rental inflation is also set to fall, lagging the declines in rent seen in newer contracts. In Europe and the UK, inflation is proving stickier but rates are still rising and the effect of past rises has yet to be fully felt. In the UK, particularly, the greater use of fixed rate mortgages has blunted, but only delayed, the effect of rapid rises over the past year. Having seen several disappointing inflation numbers in recent months, investors may be guilty of extrapolating the disappointment, ignoring the possibility that the numbers will start to match, or undershoot, forecasts.”

Samantha Fitzpatrick, Fund Manager of Murray International Trust, said: “Headline inflation is already falling sharply almost everywhere and should continue to decline over 2023 due to energy base effects. However, core inflation remains elevated, including here in the UK. It also needs to be remembered that even a lower positive number still means prices are rising, not falling, or even staying the same, so inflationary pressures will not disappear anytime soon.”

Chris Clothier, Co-Manager of Capital Gearing Trust, said: “We expect inflation to come down later this year, but at a slower pace than markets or the Bank had initially expected. A combination of supply and demand-side factors has served to keep inflation elevated. On one hand, supply-side factors such as tight labour markets and the prolonged impact of shocks from food and energy have kept input costs elevated. On the demand side, continued wage increases and longer fixed terms on mortgages have kept household spending elevated for longer. This experience of more protracted inflationary episodes is in line with historical experience: a study by Research Affiliates of OECD countries since 1970 showed that, once inflation has gone through a 6% peak on average it took seven years to fall back to 3%.”

Where are you seeing investment opportunities in the current circumstances?

Chris Clothier, Co-Manager of Capital Gearing Trust, said: “The bond market is replete with opportunities not seen for 15 years. We are attracted to UK Treasury Bills yielding more than 5%, short-dated investment grade corporate credit yielding between 6.0% and 7.5% and five-year UK index linked gilts offering real yields of 0.9%.”

Samantha Fitzpatrick, Fund Manager of Murray International Trust, said: “At Murray International Trust, the soaring cost of borrowing led to £60 million of debt being repaid at the end of May this year. Our approach to gearing remains unchanged, in that it should always be driven by opportunity – can we make money on the debt? We are fortunate to be able to pick and choose what debt we decide to have in these uncertain times.”

Andrew Bell, Chief Executive Officer of Witan Investment Trust, said: “Bond yields have risen from risible to visible and now offer a positive real yield based on long-term inflation forecasts. They can now just about fulfil their role as portfolio diversifiers and preservers of value but that is about it. In Western economies, long bond yields are lower than short-term yields, suggesting that the bond markets think rates will need to be cut in the next year. If central banks avoid overkill (and stop steering policy using the rear-view mirror) growth should pick up in 2024, which might slow progress on inflation and nudge long yields up but would benefit the parts of global equity markets that are pessimistically valued. Broadly, that means non-US equities in cyclically sensitive sectors and those benefiting from enduring growth themes, of which two particularly interesting ones are the decarbonisation energy transition and the spread of AI.”

When we hear the likes of ex-Prime Minister Liz Truss accused of reverting to an economic theory known as trickle-down economics, what do ‘they’ mean?

What is trickle-down economics?

In its simplest form, trickle-down economics is the theory that by increasing the wealth of the rich, they will spend more money, which would trickle down throughout society, leading to more wealth for all.

How does trickle-down theory work?

The theory itself is relatively simple, with the concept being that if we cut income and corporation taxes in our society and de-regulate our financial institutions, the increased wealth of these individuals and corporations would result in the rich being able to spend more of this additional money. The rich would then, in theory, invest and spend this new excess in wealth, which would, in turn, result in an increased demand for goods and services, increasing employers’ ability to recruit more staff and offer higher wages.

In this theory, the argument presented is that cutting taxes increases the incentive to work. If workers have a lower income tax, they would then be incentivised to work longer. In addition, reducing taxes such as corporation tax should encourage businesses to invest, which would, in theory, increase wealth.

Another outcome would be that the wealthy would invest in businesses, creating new jobs and more income for those employed. If the wealth is invested in new companies, it will create new jobs and increase the incomes of those employed.

As a result of the above-referenced spending and investment, it is theorised that this would stimulate economic activity, which in turn would increase tax revenues through more income tax due to the increased jobs or higher VAT due to increased spending.

These higher tax revenues could then fund public programmes such as healthcare, education, and welfare payments to the poorer in society instead of, the higher taxation that limits the richest in our society from investing.

Does trickle-down economics work?

This is mostly subjective and down to which side of the economic spectrum you lean on. It has both its pros and its cons, and essentially, as with most things in life, it would depend on how you would be personally affected.

There are examples of trickle-down economics in practice. Famously, President Ronald Reagan and his “Reagonomics” became a beacon to those who believed in trickle-down economics when he passed two tax reform bills in the 1980s which brought tax down for higher earners from 73 percent to 28 percent, as well as reducing corporation tax from 46 percent to 40 percent. It is argued that as a result of this, the USA came out of recession in the 1980s and is lauded as an example of trickle-down economics working.

However, this paints only a small picture of that time, as in addition to reducing taxes, government spending increased by 2.5 percent a year, and federal debt in the USA tripled. Therefore, it is argued by its detractors that trickle-down economics in its purest form wasn’t ever implemented fully, and it could have been the increased government spending that, in fact, ended the recession.

There are further examples of this theory being put into practice, such as President Herbert Hoover’s Great Depression stimulus after the crash in 1929, Prime Minister Margaret Thatcher’s policies in the 1980s, and President George Bush’s Tax Cuts in 2001. So the theory has been tested, though some would argue not to its full extent and in its purest form.

In reality, however, one thing that becomes very apparent when this process is applied is that economic inequality increases. Suppose we use President Reagan’s and President Bush’s cuts as examples. According to trickle-down economics, Reagan’s and Bush’s tax cuts should have helped those at all income levels. But the opposite result took place: income inequality worsened. Between the years 1979 and 2005, the bottom fifth saw a 6% rise in after-tax household income. While this on its own seems great, it’s important to note that the top fifth experienced an 80% increase in after-tax household income. The income of the top 1% tripled, showing that prosperity was trickling up rather than down.

Why does economic inequality happen as a result of trickle-down economics?

In most cases of its implementation, the rich get much richer because they don’t want to invest their excess wealth. As a result, money is often stored in off-shore accounts to further preserve their new wealth. Furthermore, tax cuts for the richest in society don’t often translate to increased consumer spending, rates of employment, and government revenues in the long term. Inequality rises, and examples of the opposite system seem to work better with tax cuts for middle- and lower-income earners driving the economy through the trickle-up phenomenon.

In Conclusion

The trickle-down economics system does have its merits; however, in most practical examples, the successes are somewhat clouded due to the use of other measures to prop up trickle-down economics as a system. Therefore, it seems that as yet, we haven’t seen the theory work on its own, and with the recent failure of the Liz Truss & Kwasi Kwarteng mini-budget in the UK in October of 2022, it seems that this may continue until a severe shift in economics and public opinion can happen.

Jacob Mallinder – Finance Monthly

Corporate treasurers have barely had a moment to catch their breath. A pandemic, geopolitical conflict, rising interest rates, financial market volatility, bank collapses, and other major issues have caused a relentless amount of disruption.

But what some treasury teams might not yet be adequately grasping is that it is not a temporary state: volatility is the new normal and corporate treasury teams must adapt with urgency or risk getting caught unprepared if the next adverse event impacts their organization’s financial health even more directly.

In particular, corporate treasury teams must take steps to build their own safety net—not for “normal” fluctuations in operating conditions, but for a world where regular volatility is itself the norm. Doing so is key to ensuring alignment with the CFO and broader C-suite’s strategic goals in ever-changing conditions.

Don’t let past stability mislead you into overconfidence in your financial strength and flexibility. Effective corporate treasury planning and execution are challenging even in the best of times, and it’s become an order of magnitude more difficult given now-ubiquitous choppiness in virtually every industry.

Corporate treasurers and the office of the CFO can strengthen their organizational alignment and stability if they take proactive steps to adapt. Consider these three strategies for doing so.

1. Refocus on the fundamentals.

Particularly within any organization that has not yet felt the effects of such regular macro disruption, it may be tempting to adopt an “if it ain’t broke, don’t fix it” mindset. But that risks ignoring the realities of the past three years. Instead, it’s time to proactively and holistically revisit and optimize treasury fundamentals, including a thorough understanding of your cash positions, your forecasting, and other core treasury activities.

Making an effort (now) to do this creates the foundation for fostering organization-wide stability, but it also empowers the business to more rapidly pursue new strategic opportunities or competitive advantages. To not do this likely means you’re not maximizing your working capital and operating from a position of strength.

The rising interest rate environment is a great example of the need for agility. There’s regular movement into and out of various asset classes as a means of chasing and optimizing yield, yet many organizations aren’t positioning themselves to take advantage. They can’t react quickly enough or do things like real-time payment transfers, which subsequently means they’re underutilizing their valuable capital.

2. Go beyond the basics.

In volatile capital markets and macroeconomic conditions, the basics—an ERP system, your bank portal, etc.—are no longer sufficient on their own. You need a comprehensive, single source of truth about your cash positions. Otherwise, depending on the specifics of your FI structure, you’re probably missing out on interest rate arbitrage opportunities. And if you’re a multinational business, your FX strategies are probably not working optimally.

The pandemic, in particular, underscored the need for systems that codify data and knowledge, so that when employees leave, there is minimal “brain drain” effect.

This is all the more crucial because volatility isn’t just a matter of macroeconomics. Big-picture conditions constantly intersect with a company’s microeconomics, and when the latter isn’t well understood by the people who need to know it best – the treasury team – then missed opportunities and major problems are more likely to happen.

Without actionable, visible knowledge, treasury teams can’t make decisions in real time. Recent bank failures are a stark reminder of the need to understand how macro conditions intersect with company specifics on a 24-7 basis. Corporate boards are asking more direct questions about the business’ cash positions, risk exposures, and organizational readiness to adapt in the face of significant disruption. Clear, actionable answers to those questions require clear, actionable information.

Sub-optimal interest rate hedge programs are a direct outcome of disjointed approaches to cash management and forecasting. Traditional hedging programs have focused too much on “easing” the CFO and other stakeholders into a changing rate environment. But what if the C-suite wants to act with urgency? That’s no longer sufficient in terms of how you manage risk in a volatile rate and FX environment.

If you’re still running the same generic program put in place a year (or more) ago, it’s time to revisit it.

3. Invest in automation and digitalization.

Underpinning all of this is a lack of digitalization and automation in the corporate treasury realm. Teams are relying on manual, legacy processes because that’s what has always been done, not because that is the best path forward.

True strategic alignment with the C-suite and board requires the visibility and nimbleness that comes with increasing automation and optimizing processes for the digital age. This is both a technology and culture endeavor of “the way we’ve always done things” can’t be treated as sacrosanct.

As Catherine Portman, VP, Treasurer at global cybersecurity firm Palo Alto Networks told me recently: “Automation has been critical to modernizing our treasury operations, and the improvements are stark. We’ve spent the last 18-24 months increasing our use and integration between our global Treasury systems, our banking partners, and ERP system. Instead of manual banking logs, downloading documents, and tracking balances across a myriad of spreadsheets, we’ve fully automated our process. This not only reduces manual work but ensures a more timely, less error-prone operation that can accommodate increased volume as the Company’s activity grows. These efforts align with our CFO’s vision to simplify, build systems to scale, and enable efficient global processes across the organization.”

The bottom line depends on accurate, real-time data. Boards demand it, C-suite leaders demand it—and corporate treasurers should, too. It’s the only viable way (especially given that treasury teams are being asked to more than ever with the same headcount) to ensure stability and strength.

By adopting automation and adapting processes for the age of disruption, treasury teams won’t just survive – they’ll thrive and help their businesses do the same.

Renaat Ver Eecke is the CEO at GTreasury, a treasury and risk management platform provider. 

2023 will be an interesting year as it precedes 2024. Although that sounds obvious, 2024 will see a new European Parliament and Commission and, in all likelihood, a general election in the UK (not to mention a Presidential election in the US). In Brussels, there will be a focus on getting the programme of the current Commission finalised as far as possible and, in the UK, the current Government will be pushing to demonstrate it should be given an extended mandate.

Pressure will be building on policymakers to act, and this will need close attention. Companies should be ready to act to influence the process, whether directly or indirectly (for example through the media).

David Cook, Partner at Penta, sets out the drivers for those of us watching closely where the EU and UK are going.

Competitiveness

Despite some thawing in relations in 2022, the shadow of Brexit continues to loom over both the UK and EU and competitiveness between jurisdictions has become a key concern. In the UK, the Financial Services and Markets Bill will provide regulators with a secondary objective to consider the UK’s competitiveness. The UK government has also set out its strategy for regulation in the form of the Edinburgh reforms. These focus mainly on reform to parts of the UK system that have proven unpopular and have been badged as using Brexit freedoms. Ironically, some of the highest profile reforms are in areas, like ringfencing and the senior managers’ regime, that were not actually related to EU law.

In the EU regulation aims to provide the single market with ‘open strategic autonomy’. This nebulous label intends to boost the efficiency of the single market and the competitiveness of EU firms while not relying on ‘third countries’ such as the UK.  The EU is looking to make tangible progress on its Capital Markets Union agenda, and tech and data will be important features in the regulatory work of the EU in 2023.

A regulatory focus on competitiveness might sound attractive, but memories remain of the financial crisis, before which competitiveness was a regulatory objective, so there may be reluctance to embrace it. Also, regulators do not have a great record of promoting innovation and data-driven change in Europe, so a close eye will need to be kept on this.

Crypto

2022 has been dubbed the crypto winter with huge falls in the value of cryptocurrencies and some high-profile failures in the sector, including FTX and Terra. This has led to a dilemma for policymakers in Europe. The focus on competitiveness means some want to welcome this innovative technology that many people continue to believe has an exciting future. However, the risk to investors, financial stability and even the ability to police and control the supply of money is causing sleepless nights in some institutions.

The EU is, as usual, ahead of the international game when it comes to producing regulation. Its flagship regulation, MICA, is agreed and ready to pass into law (although it will be some time before it needs to be adhered to). The EU has also advanced its work on digital currencies and the ECB is currently pulling together a group on rulebook development.

Similarly, the UK is preparing consultations on crypto asset regulation and digital currency. Except for new powers around financial promotions, new regulation is not expected in 2023. However, the direction will be set in 2023.

Whether the UK and EU adopt similar approaches remains to be seen. A competitive environment could emerge where each jurisdiction seeks to be at the forefront around, for example, blockchain adoption or central bank digital currency. This might introduce risks around intended consequences, where regulatory approaches are not properly analysed in a rush to move forward. Equally, there could be excessive caution that limits the development of the sector in Europe. It will also be interesting to see how the UK and EU overcome the dichotomy of regulators, who will be very concerned about the risks, versus those who want an environment focused on innovation.

Sustainability and productive finance

In an environment where public finances are suffering from severe stress, governments have been focussed on how private sector finance can be used for public policy purposes and how investors can be sure their money is used for such purposes. This is most apparently seen in the regulation around climate change where the EU’s impressive array of rules, including the Taxonomy and disclosure requirements, are becoming a huge compliance challenge for many firms operating in the EU. The UK is pursuing its own agenda and there’s an ambitious approach being developed where the divergence from EU rules is creating its own challenge.

There are also plans to consider how changes in regulation can increase sustainable investment and, in the UK, other policy objectives such as levelling up and promoting innovation. Last year saw the candidates to become UK Prime Minister talking in public debates about how changes to regulation such as Solvency II could be used to promote more of this type of investment in the UK.

Changing regulation in the EU and UK will create risks, burdens and opportunities for the firms that fall into scope. New disclosure requirements are likely to be hard to meet but changing investment rules could play to particular businesses’ strengths. Firms should ensure policymakers understand what’s practical and effective.

Energy

The events of 2022 mean that energy security and cost are a top priority in Europe and politicians have been quick to act to support markets and consumers. When it comes to financial services, there are three main concerns. First, can investment be increased to help reduce the reliance on fossil fuels generally, and Russian gas specifically? Second, have markets delivered efficiently for European consumers. Third, could energy market turbulence lead to turbulence on financial markets, as seen in markets such as the London Metal Exchange.

Of these three, the first concern has increased the urgency around creating a regulatory framework to increase investment in non-fossil fuels (as described above). For the second point, appetite for direct intervention by authorities in markets has been rising, particularly in the EU. This is very uncomfortable for those firms active in energy markets where price caps and public sector produced financial instruments (like price benchmarks) are likely to distort markets and could undermine confidence if not properly calibrated. Policymakers, lacking specific expertise, are going to need a great deal of assistance.

Finally, the third point about risk moving from energy markets to financial markets is likely to be challenging, particularly for those firms who prefer to avoid operating under the burden of financial regulation. Without proper calibration, new measures are likely to raise the costs of operating on energy markets and lead, ironically, to higher energy costs.

Financial Crime

Finally, a focus for regulators will be around how to reduce the levels of financial crime and keep investors safe. The losses to investors caused by the collapse of crypto-currency prices have been part of the story, but there have been a number of misselling scandals that have embarrassed regulators and shaken confidence in investing. In the UK we can expect to see the FCA act to strengthen the approach it is taking to protect consumers. We should also see regulation that helps reduce scams by increasing the requirements on banks and social media providers.

In the EU there is a package of measures around anti-money laundering under development to ensure a more harmonised approach across the single marker and also create a new EU-wide regulator to enhance supervision. This is likely to mean increased compliance and due diligence costs for those brought into scope.

Employers added 223,000 new positions last month, pushing the jobless rate down from 3.6% in November to 3.5%, sparking hopes that the largest economy in the world will avoid a drastic economic downturn.

It has held this position since the 1890s, buoyed by technological, financial, and manufacturing technologies. In recent years, China has modernized and transformed into the fastest-growing economy. Today, the Chinese economy is second only to the US in size. The top two economies control 41.89% of global GDP.

What is GDP and why do we use it as a measure of economic success? GDP is a measure of the goods and services produced in a county during a specific period, usually a year. In a growing economy, the volume of goods and services grows. As the economy slows, the number of goods and services will also slow down or even contract.

Is the US Heading for a Recession in 2023?

GDP in the US has grown steadily since the financial crisis of 2009. It quickly rallied from the pandemic recession because of the vast and lasting government response. 2021 brought growth and prosperity. The country was hit by hard-hitting inflation, the highest since the 1980s.

The Conference Board of Forecasts expects economic difficulties in the US to expand in the wake of persistent inflation and the Federal Reserve’s aggressive fightback. The bank increased interest rates several times during 2022 by an accumulated 4.25%. The Board’s expectation for 2023 is a recession and a zero increase in GDP for the year. The forecast is for a short relatively mild recession with a rebound toward the end of the year.

When Will Inflation Drop?

Interest rate increases have affected the housing market, as mortgage repayments escalate. The rampant dollar will negatively affect US corporate profit margins. The inflation rate is likely to soften from the 2022 projection of 7.7% to a much lower 3.4%. Lower housing prices, high inventories, and decreasing demand will all help to moderate inflation.

Slowing inflation will allow the Federal Reserve to curb interest rate increases. The bank has signaled its intention to continue raising interest, at least in the first quarter of 2023. Thereafter, it is likely to hold interest rates and start to reduce rates in 2024.

US Economic Outcomes 2023 and Beyond

Employment growth in the US in 2022 has been nothing short of remarkable. November’s unemployment rate was 3.7%, so organizations battle to find the skills they need. Large layoffs in 2023 are unlikely because companies will want to retain the skills. Still, Morgan Stanley predicts that 2023 will end with a slightly higher unemployment rate of 4.3%.

The ageing population could present the US with one of the biggest financial headaches of the future. In an economy already at full employment, a declining workforce will lower productivity, and cause increased wages and inflation. Future government policies must center around expanding the tax base and building healthcare infrastructure for elderly care.

The outlook for 2023 is far from certain. The war in Ukraine, ongoing gas shortages, supply chain shocks, and the increased cost of energy will continue to weigh on prices and growth.

China’s recent pivot on its zero Covid-19 policy should increase global trade as the borders open and trade increases. The Chinese people are not as well-inoculated as the western world. An exposed population may succumb to severe illness. This could force a return to economic lockdown in China with knock-on effects on the global economy. 

What about the long-term future? Will the US retain its current position as the world’s biggest economy? Global consultants PricewaterhouseCoopers, in their 2017 report called “The Globe in 2050” predict that India and China would overtake the US as the world's largest economies. The report forecasts a world economy that doubles between 2016 and 2042. Emerging markets like Brazil, China, India, and Indonesia will drive this growth.