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 in the coming months. We’re excited to present his latest instalment.
In this quarter’s update, Roger reflects on the geopolitical and seasonal factors impacting the current financial landscape - as well as critical considerations that businesses should keep in mind when facing these challenges.
From the potential impacts of high levels of inflation and labour shortages to global trends and concerns, read on for Roger’s takes on where we are financially - and where we’re going to be a year from now.
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Levels of Inflation to Remain High
The current rate of inflation across western nations sits between 8–10%.
The majority (6%) of this is due to businesses and households spending funds created by excess money growth during Covid, as well as constrained supply during lockdowns. But a sizeable 3–4% is down to Russia’s invasion of Ukraine.
Roger expects the inflation rate to continue to sit at a high 8% in 12 months.
The Labour Shortage Continues
The UK, Italy, and Germany all face dwindling populations as a result of labour shortages and low unemployment rates. The USA and China are at full employment, although the USA can always attract more immigrants.
Adding to labour shortages is an increase in wealth in some nations - giving people more choices and enabling earlier retirement. UK wealth rose by 9% over the past year while the US saw a staggering 20% increase.
To deal with the challenges that come with reduced labour, Roger advises that higher levels of investment are needed to increase automation, productivity, and output per hour of work.
Many countries - including Japan, Italy, Portugal, Germany, France, the UK and China - will also need to boost labour substitution to keep up.
Read Roger’s insights in full by downloading this quarter’s economic update.
UK Prospects are Optimistic
Reports on economic data in the UK within the past year have been misleading, says Roger.
Firstly, reports on GDP for the first quarter of this year were labelled as disappointing. Yet, GDP actually currently sits at 0.8% - twice its pre-Covid growth rate - and will move rapidly towards a growth of 0.4% per quarter.
Secondly, abnormalities caused by post-lockdown surges skew data when factored into year-on-year comparisons and annualising monthly percentages. This can represent average price rises at impossible rates, while the economy is actually slowing to its normal growth rate.
Thirdly, reporting on wage growth has focused on the basic wage growth of 4.7%, rather than the earnings growth of 8% - which, until April, was ahead of inflation.
Increased money supply and rising house prices
The growth in broad money in the UK has returned to pre-Covid levels - at 5% year on year. Roger expects that to rise by 6–7% over the coming year.
This is because, in August, the Bank of England will relax the requirement to prove that first-time buyers can maintain their lifestyle if interest rates rise by 3%. And the mortgage default rate is at a record low of 0.7%.
Expect house prices to increase by 6% as a result, Roger advises.
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The Global Situation
The global situation is a mixture of good and bad.
China’s zero-Covid policy is massively reducing the global supply of manufacturers’ goods, while Russia’s war on Ukraine is resulting in a global food crisis. Expect food riots if the 20 million tons of harvested Ukrainian winter wheat is not exported, Roger says.
Global real income grows 4% on average per year. But Roger predicts we can expect just a 3.5% growth this year - 2% lower than last year.
This is likely to lessen the high demand for labour by the end of the year, meaning inflation will fall to 5% by the end of next year.
To finish off his report, Roger leaves us with his list of things that could go wrong as well as key considerations for the coming year.
On the list of things that could go wrong, we see potential Covid variants and lockdowns in China, energy rationing and food shortages, continued conflict in Ukraine, a potential invasion of Taiwan by China, and much more.
In terms of things to consider, Roger advises:
- Keeping and developing employees is less costly than recruiting, and businesses should embrace Gen Z employees to accelerate digitisation
- Number of insolvencies will soar over the next year
- Composite PMI gives an indication of our system slowing down and normalising
To read Roger’s insights in full, download this quarter’s economic update.
Image via adobe stock by Mangostar