4 Key Factors Influencing the Economy in 2023

Every quarter, behavioural economist and Vistage speaker Roger Martin-Fagg shares his expert analysis of the current financial situation and what we can expect to see over the coming year. 

In this quarter’s update, the outlook for this year has improved significantly since the last. UK citizens are feeling more confident in its economy as a result of a government that’s making good choices. While the return of the USA and China to growth will have a strong impact on EU markets. 

Here are Roger’s predictions for the end of 2023…

• Real GDP +1.5% 
• Nominal GDP +6% 
• Wage growth +5% 
• Inflation Rate +5% 
• Base Rate 4.25% 
• Average house price 0% 
• Unemployment 4% 
• Exchange Rate $1.26, €1.15

In this blog, we’ll run through four of the key drivers behind these forecasts as well as Roger’s insights on why they’re happening.

For the full story, you can download Roger’s Economic Update for free here. 

1. Nominal and real GDP likely better than expected

While global growth in 2023 is expected to nudge 3% (with the key drivers being the USA and Asia), the UK’s is likely to be higher, at 4–5%, Roger says. This is because minimum wages will increase by 9.7%—which is 9.4% above average productivity growth. 

The UK Treasury forecasts nominal GDP will be 2.5%. But recent data shows money supply growing at a nominal rate of 4% year on year—which actually suggests that nominal GDP growth of 4% is likely. 

This data on money supply suggests:

• The inflation rate will fall rapidly 
• Business investment should surge with a stable government and the 100% CapEx allowance announced in the budget
• Further increases in base rate are unlikely 

Roger also predicts a strong second half of this year that exceeds expectations. 

The falling price of gas will be reflected in household bills in 3–6 months, which means we’ll likely see households begin to release savings towards the latter half of 2023. We’ll also see high performance from retail and investment spending, as well as inflation between 4–5% with wage growth in booming sectors reaching 5–10%. 

2. The “Banking Crisis”

With the total wipeout of the SVB in the US and Credit Suisse’s takeover by UBS, businesses might worry we’re headed towards another global financial crash like 2008. 

This crash won’t happen, Roger says, but the sale of Credit Suisse to UBS has upset the markets. This is because they switched to prioritising equity holders over Additional Tier 1 bondholders, meaning bondholders would lose all their money first. 

While the ECB and B of E stated clearly that the principle of bondholders before equity holders remains sacrosanct in any failure, this switch has still caused all banks to come under close scrutiny, the price of AT1 bonds to collapse by 30%, and considerable damage to the reputations of Swiss banks. 

3. UK and EU Trade

The EU is the UK’s biggest market—with 43% of all UK exports going to the EU, and 45% of our imports from there. But we currently have a trade deficit of circa £30 billion with the EU. 

As we’re no longer a member of the EU single market (as per the terms of the UK-EU Trade and Cooperation Agreement), we need to start building stronger and deeper links with the EU if we wish to prosper, Roger says. 

4. Property and the Housing Market

Finally, let’s look at property. As you know, the price of Commercial Real Estate (CRE) is closely related to the yield on gilts. In Q2 last year, the Truss budget caused gilts to soar, which meant CRE prices had to yield and maintain their attractiveness as an asset class, Roger says.

But now that the spread is returning to normal at around 2%, CRE yields will begin to stabilise. Roger’s outlook depends on rental growth being the driver of return over capital growth, but rental growth will depend on economic activity, which is constrained by labour supply. So, Roger predicted a spread of 2% over ten-year gilts and a return of 5%.

Average house prices are also 2% higher than they were last February and transaction volumes have fallen to 90,000 a month. While the average price of a two-year fixed 75% loan to value is now 4.8%, and is unlikely to climb higher. 

Roger expects buyers to return to the market midway through 2023 and for transaction volumes to increase by 5,000 per month. But he doesn’t expect average selling prices to fall, which is great news for sellers but not-so-great news for buyers. 

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We hope you found this article useful. To read Roger’s full Economic Update and forecasts, you can download the full report for free here.

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