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The transcript for ICAEW Insights podcast episode 42: 'What can we expect from 2023?'.

Philippa Lamb: Hello, and welcome to the first ICAEW Insights podcast of 2023. I’m Philippa Lamb. This time we’re exploring what 2023 might hold for the UK economy, and of course the business world. And while 2020 and ’21 were dominated by the urgency of the pandemic, last year was altogether different. A raft of economic and political pressures collided at home and abroad, and uncertainty is still the universal watchword as we look at the year ahead. Many of the trends that kick-started 2022 – inflation, rising interest rates and stalling growth – are expected to continue, but for how long, and how significantly? And what fresh surprises might the new year bring? So, for a spot of expert crystal ball gazing, I’m joined by the same team of guests who reviewed last year for us in our Christmas episode: Frances Haque, Chief Economist at Santander UK, Iain Wright, ICAEW Managing Director of Reputation and Influence, and David Williamson, Political Editor of the Sunday Express. Welcome all. You all did sterling work reviewing and analysing 2022 in our last podcast. Before we look ahead, shall we assess where we are now? Briefly, Frances, where are we economically?

Frances Haque: I would say in a downturn, if you want to be brief about it. Things are not looking rosy from a growth perspective. But hopefully, looking forward, the markets will remain calm – which obviously they weren’t doing in 2022 – and things will start to improve towards the end of the year.

PL: I should say at this point, we are recording this just ahead of January, so you’ll have to bear with us if we miss any significant events that happen in the meantime. But David, politically, where are we?

David Williamson: We’re in a position where there’s a young, thrusting Conservative leader who’s got a giant majority. There is a great confrontation with the forces of the left in the trade unions showing a new degree of militancy. Those are the type of situations that I think a lot of people who dream of becoming Conservative MPs think, ‘Wow, that’s a great battle for the ages.’ They think back to Thatcher’s era and think, ‘Wow, it’s gonna be the propulsion for great things in normal circumstances.’ The problem is this isn’t normal circumstances at all. There is this chasm of opinion that Labour has over them. And it isn’t that there’s been a transformation in how the public perceives Keir Starmer, but it’s rather been that 2022 has been a case study of how to sabotage a party that has weathered spectacular storms in the past, and Rishi’s mission really is whether or not he can stop the water coming in and get it to a safe port of shore in time for next year’s elections, which are looming so close in everybody’s minds. Partly because of self-interest as well, because if you think that the economy is very bad, I think you have parties getting the blame for everything, and you’re likely to lose your seats. The employment options for a lot of MPs are going to be quite difficult. One MP said to me, if by March things haven’t narrowed, it’s going to be in a fight of every man for himself or woman for herself.

PL: So, they’ll jump ship?

DW: Not just jumping ship but going into pure survival mode. And the type of febrile frenzies that we have seen producing very unpredictable results over the last three years could manifest themselves in new ways.

PL: Iain, business sentiment – you track it, where is it?

Iain Wright: It’s low, it’s in negative territory, we’re probably not at the bottom of that. If you look over a 20-year period – because that’s how long ICAEW has had a business confidence monitor index – we’re not in 2008 negative territory when confidence was really, really low. But there’s been a sharp trajectory fall from the heights of real optimism coming out of the pandemic. We’re on a par now with pandemic levels, Philippa. And we’re on a par with that uncertainty that was happening round about 2019 as the UK was coming out of the European Union, and what that would look like. But we’re probably not at the bottom, 2023 will see much sharper falls. And actually, we’re probably in recession as this podcast goes out.

PL: What do we know, Iain, that will happen in 2023? Do we have key events that we know are in the calendar?

IW: In terms of what the Bank of England might do, businesses are factoring in further interest rate rises, certainly in the first half of 2023. In terms of general economic policy, what’s really interesting is how government is trying to use regulatory policy as a big, big, significant arm of economic growth policy. 2023 will mark the fifth anniversary of the Karelian crisis, and audit reform has still not been finalized. I know we’ve had a global pandemic, but are we going to see some sort of resolution when it comes to audit reform and corporate governance changes? But also, there could be the prospect of regulation of the tax profession, and what’s going through the House of Commons at the moment is the Financial Services and Markets Bill. What does our financial services sector – an incredibly important part of the UK economy, something that we’re world-class at – what does that look like post-Brexit? And so making sure that some of the regulators have an object in law to push forward our competitiveness as a sector for the UK economy over the medium term. As I said, the UK government will be trying to use regulation as a means of driving forward competitiveness.

PL: David, politically thinking, we’ve got local elections coming up?

DW: We do, in May, and it’s still technically midterm-ish. That means that we’ll probably have party sources giving absolutely dire predictions. Local elections are fascinating, it’s the one thing where the parties compete to have the worst possible predictions so that any surprise winners are then held up as a triumph that the rest of the nation is swinging behind. So there’ll be probably lots of attempts to extrapolate that. To be honest, the real results that probably Rishi is going to be more worried about are going to be economic indicators. And not necessarily things like GDP, because in a way, suddenly, house prices are like the personal GDP of a household. It’s how wealthy and how well-off people feel. We have a generation that’s been on this incredible exercise in putting faith in the law that the house prices in Britain now always go up, and the interest rates are low, and it’s a crisis of faith. It’s a thunderclap psychologically, where so many people between the ages of about 25 and 55 are suddenly grappling with this incredible change. If they have the sense that their own GDP is going through the floor, that’s going to be the biggest worry for any party that wants to stay in power.

PL: So real psychological risks there. And obviously, zooming out, we’ve got big events rolling on this year, we’ve got the war in Ukraine continuing.

DW: It’s going to have such a determinative effect. There are people who are optimistic about this year, and one of the key reasons for optimism is if Ukraine can be resolved peacefully, if it looks as if Russia is looking for a way out, and if somehow, in the scheme of awful four-dimensional chess, if some way can be found that allows some sort of soft landing. But at the same time, I think there’s an equal number of people who are fully aware of the potential for nightmares to be realised on a scale that we’ve never seen in Europe since World War Two.

PL: And the Northern Ireland protocol, that’s still under negotiation?

DW: It is, and you wonder if it’s the type of thing that will be under negotiation for years to come. But recently, there has been a little more optimism. There is a sense that the Biden administration might be perhaps playing a more positive role. Actually seeing if there’s a deal to be done. Every side, whether it’s Europe, or Washington, or London, or Dublin, or Belfast, every side has some political gain from a bit of a conflict over this issue, because they’re able to play two different bases on this. But there’s a new Northern Ireland envoy appointed, which seems a very positive step that can grease the wheels a bit. And also Macron’s had his election, and, I think, very much wants to project a more positive, can-do, pragmatic problem-solving thing. So when we’re faced with so many problems that we have absolutely no ability to solve, to actually get a win in the book would be great. And it’s also tied into domestic UK politics in a very real way in that Northern Ireland doesn’t have a functioning government, and for so much of its recent history hasn’t. There is the mantra of defending the Good Friday Agreement, but in Northern Ireland, there is certainly the sense of, we do need a functioning democracy.

PL: So Frances, if we’re thinking economically, perhaps globally and then closer to home?

FH: Yes, I think globally, we’re expecting a slowdown. That’s inevitable, I think. In terms of the US economy, it weathered it much better than the UK one, but equally the feeling is there will be a mild recession there and in other places. And obviously China is having a problem as well, so you put all of it together and you think from a global perspective, that will be challenging. And of course, despite the fact that there is this push for deglobalization, we are still all very much a global market. So any effect of a slowdown in other economies will, of course, affect our own economy and our ability to trade. But in terms of closer to home and the UK economy, this year is going to be difficult. And I’m sure that everyone feels that as well. It’s been very interesting, I think we might have noted this in the last podcast, but around savings and things like that, people and businesses thought that those savings would start to be spent. Well they haven’t, people are holding on to them. And that generally suggests they’re very worried about what might happen. And also, we know from credit card data, people aren’t putting as much on their credit cards. So, they are genuinely worried about how they’re going to pay for all these things. So, from this year, I think spending will be hard. Having said that inflation obviously is the area of most concern, because we don’t know what’s going to happen to energy prices. The hope is that they’ll start to flatten, or they won’t increase, they’ll start to flatten and then fall back, and that will help inflation. But equally, we need to look more internally at what’s happening to wages in the UK, and is that going to drive inflation, too? Because that is very difficult for the Bank of England. They’ll feel it’s more necessary if that’s increasing to keep going with bank rates.

PL: It sounds like that’s what you think’s going to happen?

FH: In a normal recessionary environment you would expect the labour market to start to ease. And that’s the question, is it going to ease? Because we’ve got problems with inactivity, so long-term sick has increased immeasurably, and we know early retirement has been increasing. But could it be the early retirement reverses because people need to come back to work because they need the money in order to be able to live? That’s an interesting question. I think on the long-term sickness side, it’s very difficult, because I suspect a lot of that is connected both to long COVID, but also to long waitlists, and it’s going to takes take time to get through those. And very interestingly, a piece of work that someone in my team has recently done is focusing on the fact that these long-term sick are younger people, and that should be a serious concern to all of us. Because given that we have an ageing population, if we’ve got even younger workers out, because they’re not able to go to their jobs because they’re sick, that’s a real problem for the future.

PL: Back in the day, muscular-skeletal was the key driver of absenteeism, wasn’t it? Now, it’s mental health, and the age demographic is much lower, that’s a big change. Iain, business conditions, we’ve obviously got the energy crisis very much still with us.

IW: If you look at our economy in quite simplistic terms, in line with other mature Western democracies, our economy is based upon domestic consumption. And certainly in the UK, our domestic consumption, if you’re a homeowner has had the backdrop of cheap credit, cheap interest rates and expectations of ever-rising house prices, feeling that sense of well-being and prosperity. That seems to have gone. Higher interest rates, the possibility, if it’s not happening already, of house-price falls means that people don’t feel confident in the future, and therefore won’t invest in a larger house, a conservatory, home improvements, that sort of thing. They won’t spend money. Linked in with that is people don’t have the money to spend. Energy prices, inflation in general, has meant that that level of disposable income has been cut to a very, very low level. The factors of economic growth in the UK have been very much curtailed and will continue to be so through 2023.

PL: And last year, Iain, we talked about the cost-of-doing-business crisis, didn’t we? That’s certainly persisting on various fronts.

IW: Well, I was really interested in what Frances was having to say about the labour market. The UK’s labour market is incredibly tight. Throughout 2022 businesses were telling me, ‘We don’t have the staff. We could grow a bit further. We could do a bit more, but I can’t get the staff.’ I think that tightness will probably remain. The Bank of England, the governor and the chief economist have been very strong in saying that inflation was not invented in the UK. Of course, we imported it through Ukraine, through supply-chain difficulties. But it might grow up throughout 2023 here in the UK. The second-round effects of wage claims, quite understandably, with a 10% inflation rate, people want to get high-pay claims. That tightness of the labour market, you tend to get a pay increase when you move jobs. So people might be looking to move jobs to get that higher wage. I think you’re going to see some elements of that come through.

PL: And as you say, we’re starting the year with industrial action across the board.

IW: Yes, the unions are concerned about changes to terms and conditions, as well as that cost-of-living crisis, and there will be a battle between employers and governments on that. What’s interesting, though, is to what extent for certain sectors of the economy, whether that might not have had the impact that it might have had pre-pandemic, because people can work from home. If you’re on a construction site you can’t, if you work in a supermarket you can’t. But professional and business services can be quite mobile. I’m speaking to you from Northumberland. I go to London, but I don’t have to go to London all the time, and I just wonder whether we’ll see that really embed. People thought that it might have been a long-term factor, but I just wonder whether it’s going to be really, really embedded now.

PL: Yeah, that structural change. I know you have a thought about that playing into levelling up.

IW: Well, I just wonder. The house-price issue is a factor because I don’t think there’s the level of demand. And again, this is very simplistic, a bit stereotypical really, but you could be sat in a two-bedroom flat in London, and then you could go and buy quite a substantial country pile somewhere else, Yorkshire, the northeast, that sort of thing. People will be very tempted. If I’m in my stage in my career, I could still do work, I can work from home, I can use the broadband and wifi, but don’t have to be in London. If you’re slightly older, you’re slightly more advanced in your career, you might be able to do that. That might have an impact in terms of levelling up. What we’ve seen since the pandemic, we saw it very clearly in the regional factors of business confidence monitoring, was London drives the UK economy, traditionally. Its position as a global city means that in terms of productivity, it just helps propel our economy forward. It hasn’t done that from COVID onwards. People are not going into London quite so much. They’re not spending in the bars, the sandwich shops, the restaurants. People aren’t tending to go to the theatre, even with a relatively weak pound and the tourist market. The growth in regions tend to be outside of London. And I wonder whether that could be a sustainable factor in the future.

PL:  Frances, all the things that Iain’s been talking about, that plays into the commercial property market. We’ve talked about residential.

FH: I think the view for that is relatively bleak, certainly over the next year. What will be interesting is how companies are able to deal with that, and what are they going to do instead? I can only give anecdotal evidence. Back in Wimbledon, which is where I live, we’ve actually seen more office space come through, because I think there’s more demand for it at a regional type level, if you see what I mean. Rather than going into London you’re using it more locally, which is, of course, helping local businesses. But equally, you’re also seeing a lot of change of use of other spaces, in particular retail turning into more social-type use. Whether that might be gaming and things like that for the younger generation or more restaurants and things like that. But it’s quite interesting. Going back to Iain’s point, it’s going to be quite different for commercial property, depending where you are. And I think London might struggle more than perhaps in other places. You might see better regional outlays rather than where we are in London.

PL: And of course, that’s a very segmented sector, isn’t it? When you think about regional distribution, distribution warehouses, all that you would imagine would do quite nicely with our digital economy. But it’s the urban holdings, isn’t it?

FH: Yes, I think it’s what use do you have? And that will be interesting to see whether that starts to get switched. We know that there’s been a lot of warehouses, for example, who obviously have developed over the last 18 months. There’s been a real push to meet demand, because people are obviously buying a lot more online. So it’ll be interesting. I would have thought a lot of change of use maybe needs to come through.

PL: So, David, the Sunak government. What can we expect?

DW: I think maintaining stability will be the number one thing, absolutely. For most people, they don’t wake up in the morning and start thinking about the future their politicians. It’s like when you get on a train. Suddenly, it’s a journey you’ve done hundreds and hundreds of times, and the things start swaying from side to side. And you suddenly think do you look at the driver on the train? What’s going on here? I think the British people have experienced of a lot of swinging from side to side, and if they simply have a beautiful, smooth journey, that will be a great success. And I think there has been very much, certainly in the last few weeks, an attempt to actually take the drama out of politics. I think Rishi Sunak would be very happy if other stories lead the debate for quite a while, because it isn’t a sign of a very stable democracy if there’s a constant sense of that might erupt. People love these little phrases that came through, but just as whoever coined the term Brexit – if they’d copyrighted is they would be a billionaire by now – the phrase which was creeping in recently was Britaly, which is the idea that Britain is becoming Italy, that we are changing our leaders regularly, that the constituent parts are thinking very seriously about breaking up. Which, again, is a major thing which, if Rishi has any spare bandwidth to think about, he does need to think seriously about Scotland, and also talk about how to manage the whole border poll question in Northern Ireland, which will come onto the agenda in a big way sometime probably in the next five years. However, if he can simply have a Britain where people might have the hope of a summer holiday… his one advantage actually is that Monty Python says no one expects the Spanish Inquisition, but we are expecting horrendous monsters behind every door.

PL: Yes, our expectations are low.

DW: We are in a jittery state. And if you manage to get through to spring, we do see optimistic economists regularly talking about well, actually, maybe things might not be quite so bad.

PL: Green shoots.

DW: Of course, the problem is that John Major’s green shoots, that became a parody which dogged the tail-end of his government in the lead-up to the 1997 landslide. But if those green shoots actually do emerge, he will put the microscope on them and actually a lot of people will breathe a deep sigh of relief.

PL: OK, quick round table: biggest hope, biggest fear for the year ahead. Frances?

FH: Well, my biggest hope is I’m wrong in my forecast. And I don’t often say that. But yes, that will be my biggest hope. But my biggest fear is actually one of the strike action, and just how long that might go on for, because that really feeds into people’s sentiment. That would be a worry, because the economy really drives on confidence. You know, we’ve heard Iain and talking about business confidence, it’s so important and it’s at record lows, and I think things like strikes just don’t help. And let’s hope we don’t have any blackouts either.

PL: Yes, it’s all a very visible sign of the problems we know are there, isn’t it? Because you are encountering strikes and industrial action in your day-to-day life, wherever you are. David?

DW: Hope and fear are actually both centred on Ukraine, because if there is an expectation that during the winter things may calm down, simply because of the strategic things, and its intensely cold weather. And the hope would be that actually, that isn’t just a climactic thing, but it’s a strategic thing with somehow some resolution that leads to a speedy peace. The fear would be that Putin responds to its own internal pressures and feels the need to have one more giant heave, which could be cataclysmic. And there is the fear that in terms of worst-case scenarios, we have not seen anything of what could happen on that degree yet.

PL: Yes, that would be the end of your talk of a stable year, wouldn’t it? Iain, biggest hope, biggest fear?

IW: The both the same thing Philippa, my hope and fear is inflation. I hope that you see a spike in inflation, and it comes down fairly rapidly. David’s talk about Ukraine, about making sure that some of the supply of energy is addressed, that would be my hope. My reading of history is that inflation doesn’t act like that, that it hangs around. It’s a real, negative and corrosive force, harming everybody, particularly those who are in the most vulnerable economic situation. But it harms every business, it harms every citizen. And as I said, the lessons of history showed that inflation hangs around far too long. So, I hope that the bank and others can get inflation firmly under control. It’s not entirely under the bank’s control, but we really do need to tackle inflation for the good of the economy, for the good of business, but actually for the good of 60-odd million people in this country.

PL: Iain, Frances, David, thank you very much for joining us again, and sharing your predictions. It’s not an easy task right now, we’re grateful. As always, the ICAEW Insights podcast will be staying on top of events that matter to finance professionals with news and analysis throughout this year. You can catch the next Insights podcast in early February, join us for that. Meantime, please do rate, review and share this episode, and subscribe to ICAEW Insights on your podcast app.