As 2023 begins where last year left off, with widespread strikes, high energy costs, bad weather and a cost-of-living crisis, Liz Booth looks for signs of recovery.
Strikes, strikes and more strikes. When broadcasters start issuing monthly calendars with strikes on every day, you know there’s a problem.
That is the situation in the UK as 2023 gets underway. Whether it is Royal Mail, the rail services, teachers or the NHS – everyone seems to be intransigent.
Sadly, at the time of writing, it seems there is little progress and it is all having a negative impact on the economy. Combined with the winter weather, high cost-of-living and energy cost rises, it is a pretty grim picture all round.
Many clients of financial planners are financially sound and probably among the best placed to weather such a perfect storm. And there are also some green shoots of optimism.
In the US, inflation is still increasing but the rate of increase has slowed. There is a feeling that interest rate rises have done their work and that the economy will start to recover.
In the UK, there are tiny but hopeful signs. House prices actually rose in December after a few months of declining prices and analysts are saying that inflation may have peaked, as rising interest rates may have done their job. But they are cautious, warning there will be some way to go before people feel confident about spending money.
Added to that, the FTSE100 was actually the world’s best-performing stock index in 2022, despite all the doom and gloom, delivering a 0.9% gain in 2022 – a tiny amount but at least positive compared to the 20% drop in global markets as a whole.
Alternative energy sources have been found at national level to replace Russian oil supplies, while even gas supplies are being successfully replaced from “friendly” countries, meaning wholesale energy costs will drop – hopefully followed by retail costs soon after.
Not out of the woods
However, in the meantime, it seems there is still some pain to go through. Mortgage holders, for example, are set to lose up to an eighth of their income on mortgage rate rises in the coming months, according to the Resolution Foundation, with three million households set to renew their existing mortgage arrangements in the next year and with some predicting that rates will effectively triple for up to 800,000 homeowners.
Added to that, credit card debt grew by £1.2bn in November, according to the Bank of England – the highest monthly increase since back in 2004. That debt grew even though retail spending was down, suggesting, according to Ashley Webb of Capital Economics, that people are using credit to tie them over through the rising costs, such as for energy bills.
All in all, it paints a picture in which financial advisers should be more valued than ever, with clients seeking reassurance that their money is being managed in the best possible way.
There is often debate about how often clients need contact – this, according to the experts, is something that could possibly be reviewed now. Is an annual meeting or call still appropriate? Should the touchpoints become more frequent?
Hold your nerve
Many financial experts are suggesting that investors should hold their nerve and not sell out or make rapid decisions that ultimately might prove costly as the recovery happens. A prime example of that is the housing market, where rising prices put paid to the idea that we were about to see the market spiral out of control. But as they say, one swallow does not a summer make – and the doom-mongers could be proved right. Either way, this is not necessarily a moment to dump assets or stock – unless it’s essential.
Joseph Hill, senior investment analyst at Hargreaves Lansdown, sums up the state of the economy: “The real income of most consumers has been squeezed, forcing them to cut back and prioritise. Forecasts show high inflation will erode average real pay and cut living standards by 7% in the two years to the end of March 2024 – wiping out the previous eight years of growth.”
Clients are very likely to include SME business owners and the strikes may be having a very direct impact on their bottom line. A Simply Business survey of more than 600 small businesses found that more than one in 10 had been affected by the rail strikes. Of those, almost 40% said they’d made it harder to plan in advance, while more than a fifth said they have had fewer customers on days when strikes took place.
Do they have the right insurances in place to support them? They may well be at a crisis point both financially and emotionally.
After the torrid experience of business interruption (BI) insurance claims during Covid-19, many business owners will have been talking to their insurance brokers about what is covered. Generally speaking, BI covers the operating expenses for a business due to problems covered by the policy, which are generally theft, wind, fire, lightning and falling objects, or in other words, physical triggers.
Strike insurance has to be bought separately but, as one definition puts it: “Strike insurance is a type of policy that covers the financial losses to a business owner if their employees go on strike, stage a walkout, or organise some other type of interruption that shuts down business operations. If a strike continues, the strike insurance company pays the business owner to cover the income lost from being temporarily shut down.”
Forecasts show high inflation will erode average real pay and cut living standards by 7% in the two years to the end of March 2024 – wiping out the previous eight years of growth
No mention, therefore, of lost income from strikes at external businesses that then directly impact others – something clients may need to be checking with their insurer.
That brings us back to Hill, who warns: “In a typical recession, companies can be expected to make less profit and pay often falls.”
Advisory firm Cork Gully is predicting insolvencies will rise to 6,300 in Q1 of 2023 and to 6,400 in Q2, before falling slightly later in the year. It adds: “Businesses in consumer-facing sectors are expected to see the highest number of insolvencies in 2023, as they see demand decline amid the cost-of-living crisis. This could also impact city centres with large retail and hospitality industries.”
This confirms the picture being painted more broadly of city centres becoming ghost towns on certain days of the week as people work from home to avoid rail strikes.
As a financial adviser, you are not a counsellor or psychiatrist but a touchpoint might make all the difference – particularly if it comes with sound financial planning advice. Looking back at previous financial disasters when some individuals felt things were so bad that they took their own lives, almost always there was a friend or work colleague who wishes they had reached out because a simple call could have helped.
Checking in can make a real difference, particularly when it comes with sensible financial advice.
Liz Booth is contributing editor of PFP