Three of the senior team from Hargreaves Lansdown have pulled the cloth from over their Bristol ball (like a crystal ball, but based in Bristol) to highlight 10 things that investors ought to know.
1. Inflation is set to stay sticky
Susannah Streeter, senior investment and markets analyst, said: “Supersized rate hikes now appear to be in the rear-view mirror, as data filtering through indicates that the rate of price growth is slowing.
"But although inflation may have reached the peak, that doesn’t necessarily mean it’s a smooth downwards path from here. There is still the potential for plenty of pain ahead, as stubbornly high prices continue to cause severe headaches for the economy.
"Although a recession will dampen domestic demand, many of the inflationary pressures have been external, and as Russia’s offensive continues in Ukraine and energy prices stay unpredictable, it’s not certain how quickly prices will come down.
"The Bank of England has forecast that inflation will be around 5 per cent by the end of 2023, but as ever with forecasts, there are no guarantees.”
2. You’ll pay more tax
Sarah Coles, senior personal finance analyst for Hargreaves Lansdown, said the round of tax hikes in the Autumn Statement made for "miserable reading" but even before that, people in Britain were facing higher tax bills.
Coles said: “The freezing of the income tax thresholds means that wage rises will push more people into paying more tax – and push enormous numbers of people into higher tax bands.
"These kinds of stealth taxes tend to slip under the radar but can have a much bigger impact than a tax hike.
As ever with forecasts, there are no guarantees. Susannah Streeter"The Institute of Fiscal Studies estimates that freezes to personal tax thresholds will cut household income by an average of £1,250 by 2025-26."
On top of that, the additional rate threshold was cut from £150,000 to £125,140.
She says: "For those who run their own business and pay themselves in dividends, and for investors with large portfolios outside an ISA or pension, there’s also the threat of more dividend tax as the allowance halves in April.
"For those investors there’s also the risk of capital gains tax after the allowance for this is halved in April too. When you add in higher council tax and the frozen inheritance tax bands, we’re being stung for more tax on all sides."
Energy prices to stay volatile
According to Streeter, uncertainty is "coming in waves in energy markets" as supply and demand push up the oil price but keep a lid on big gains.
She explains: "There are expectations that there will be less crude available to buy given the $60 cap on Russia oil which means it can’t be shipped using EU or G7 tankers, insurance or credit lines, unless it’s below that price limit.
"However, Russia has vowed to circumvent that by leasing tankers elsewhere, and it seems likely that significant flows will be re-routed to friendlier countries."
The energy security shock may just have been delayed, not averted. Susannah Streeter
OPEC+ has adopted a wait and see policy, before introducing any further change to its already lower production targets.
But, as Streeter says, it is also unclear how the Covid situation in China will play out. Investors have been clinging onto hopes that there will be a further softening of strict pandemic policies.
Moreover, she says: "Gas storage facilities in Europe which had filled above 90 per cent are already lowering as the cold snap continues, and the energy security shock may just have been delayed, not averted."
Bills will rise
Because energy prices are so volatile, Coles says consumers will face higher prices than many might be expecting.
While the Energy Price Guarantee will keep a lid on energy prices into 2023, annual bills for the average user will still rise to £3,000 from April.
At that point, households will lose the universal lump sum payments at that point.
These lower-than-expected forecasts are already feeding through into lower fixed rate mortgages. Sarah ColesAccording to Coles: "It’s a long way short of the horrors we could have expected without the guarantee.
"There will also be extra cost of living payments for those on means-tested benefits, pensioners and those receiving specific disability benefits, which should help those who will struggle the most with higher bills.
"However, for average earners, we know we’ll be getting less help with more expensive bills.”
Mortgage interest rates may fall
If the above all seemed to be bad news, Coles says there has been a bright spark to look forward too, in the shape of falling interest rates later on in 2023 after a series of hikes in 2022.
Coles says: “Lower expectations for inflation is good news for borrowers, because although interest rates are expected to keep climbing into the start of next year and hit somewhere around 4.5 per cent, this might be the peak.
"Assuming there’s nothing unexpected lurking in the months ahead, they’re soon expected to drop back again as the recession takes hold.
"These lower-than-expected forecasts are already feeding through into lower fixed rate mortgages, and we’re likely to see those come down further."
Savings rates may drop
However, every silver lining has a dark cloud behind it.
According to Coles: "For savers, the news is less positive, because those lower rate expectations have already seen some of the most competitive fixed rate savings deals pulled.
"This means we’re likely to see these ease off as we head further into 2023.
"That said, the good news is that with inflation forecast to be around 5 per cent by the end of next year and under 2 per cent in 2024, there’s a chance that the best two-year fixes could still beat inflation.”
A housing market downturn is likely
Streeter anticipates some "big shifts in the mortgage market next year".
This is as lending plummets in the face of the cost-of-living crisis.
As Streeter explains: "Affordability is already being hit by the sharply rising costs of borrowing, making people more hesitant to take that next step on the housing ladder.
"UK Finance predicts property transactions to fall by more than a fifth over the course of the year.
The US housing market is heading into 2023 still in correction territory.Streeter"This will see a return to pre-pandemic levels of borrowing, but with buyers hibernating as the market freezes, house prices are set for a tumble."
There is still the hope that relatively high employment and low housing stock will prevent a prolonged downturn.
However, now confidence has taken a knock, she believes investors are not likely to flood back to the market in a hurry and there is a risk that a deeper dip will be on the cards.
Streeter says: "The US housing market is heading into 2023 still in correction territory, and with optimism seeping away, it could spell further repercussions for the economy as a recession sparked by house price falls has historically been shown to be deeper."
There may be less positive news for jobs
The UK has seemingly gotten used to a buoyant jobs market in the past few years, so more people have had job security and plenty of alternative options.
But while Streeter does not think the picture will change radically overnight, there are signs that unemployment has increased slightly.
The spiralling cost of providing the state pension will continue to stoke debate.MorrisseyShe says: "There were also fewer vacancies in the latest set of figures, and once recession takes hold, we may well see more uncertainty and insecurity filter through into the jobs market.”
We will continue to debate the state pension triple lock
Helen Morrissey, senior retirement analyst at Hargreaves Lansdown, says while the decision to reinstate the state pension triple lock was good news for pensioners, who will see a 10.1 per cent bump in their income next April, questions over the triple lock will remain.
Morrissey says: "The decision to suspend it last year was viewed by many as a first step towards getting rid of it long-term and the mixed messages leading up to the mini-Budget certainly didn’t help matters.
"Its return was announced during the Autumn Statement, but it remains a divisive policy."
She adds: "Many believe it is unfair to younger generations and the spiralling cost of providing the state pension will continue to stoke debate as to the triple lock’s long-term future.”
We could see further rises to state pension ages
The state pension age has risen rapidly in recent years and currently stands at age 66 for men and women - with a shift to age 67 by 2028.
The timetable outlines that the shift to age 68 should happen by 2046, though the government has been open in saying it believes it should happen earlier - by 2039.
But Morrissey believes there could be further rises as the government seeks to shore up the national debt.
She explains: "The timetable is subject to a state pension review due to be published early in the New Year, with the author needing to weigh up managing the eye-watering costs of providing the state pension against the fact that the rapid increase in longevity is slowing.
"Rumours are already circling that the timetable could be pulled forward – perhaps to as soon as 2033 – a move that would cause dismay among many older workers.”
