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Investor confidence in UK economic growth drops as inflation and income squeeze unsettles markets

United Kingdom High Resolution Inflation Concept
  • FTSE 100 falls following data showing better than expected jobs growth but wages lagging inflation.
  • Right Move among top fallers as worries rise about prospects for housing sector with interest rate rises looming
  • HL investor confidence index shows confidence in UK economic growth has dropped 2%.
  • Investor confidence in the US has fallen by 3% since November.
  • Fewer investors believe interest rates will rise in the next six months compared to November.
  • Investor confidence in the UK has increased by 4% since November.

 

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown:

“The financial and labour markets have batted away Omicron like an annoying fly, but worries are increasing that inflationary pressures combined with an income squeeze could come with a painful sting.  The effect of the great resignation as workers search for higher pay is filtering through to wage growth, but the rises aren’t keeping pace with inflation. It’s a problem already buzzing in the ears of Bank of England policymakers, as they decide when and how quickly to raise rates to try and keep a lid on price rises.

The number of investors surveyed by HL, who expect interest rate rises in the next six months has fallen back slightly to 78%, compared to 83% in November, possibly reflecting this conundrum, but it’s clear the vast majority of investors are expecting another move by the Bank relatively quickly. At the same time there has been a 2% drop in confidence in UK economic growth among investors, with the combined toxic effects of inflation and an income squeeze playing on minds. Even so optimism about UK assets has grown, with investor confidence up 4% compared to November with expectation that the weighting of listed companies towards the mining, energy and financial sectors should start to bear plumper fruit. The only sector to register a drop in confidence was North America, which is likely to be as a result of the jitters continuing about the fate of highly valued tech firms in a higher interest rate environment, which would reduce the value of their future earnings.

The FTSE 100 dipped lower in early trade, with Scottish Mortgage Investment Trust, which holds a raft of tech darlings like Tesla, Nio and Amazon among the biggest fallers amid concerns the tech juggernaut faces a road of pitfalls ahead. With other companies in the big data and payments space slipping back, information analytics firm Experian also slid by more than 2%. Companies reliant on a demand for housing were lower in early trading. Right Move was one of the biggest fallers as worries resurface that it the beginning of the end of the red hot housing market could be in sight. House builders were also lower in early trading, with Persimmon dropping by more than 1% and Taylor Wimpey also in negative territory before recovering slightly after falls yesterday, following guidance about uncertainty ahead. Higher selling prices have helped them withstand rising costs elsewhere, but there are looming questions about just how long that will continue with an income squeeze intensifying and mortgage rates set to rise.”

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