Quarter 3 (2023) update
Tuesday 21st November 2023
Katy Baxter
As we bid farewell to the third quarter of 2023, let's delve into the financial landscape of the United Kingdom and other countries to explore the key economic developments that have shaped the past three months. There is still a certain amount of volatility in the markets and indices rise and fall almost on a daily basis. Keeping focused on a diversified portfolio of funds over the longer term is without doubt the right way to weather the uncertainties.
Katy Baxter
Financial market background
The main equity regions had a mixed performance over Q3. UK equities rose over the quarter as companies were helped by sterling weakening in comparison with the US dollar and energy companies benefitting from a recovery in oil prices (the UK market has a large overweight exposure to the energy sector). Japanese equities also gained over Q3 as the yen fell, domestic demand was strong and company earnings showed solid figures. European equities, however, fell over the quarter due to worries over the negative effects of interest rate rises on economic growth, with some of the steepest declines coming in the consumer discretionary sector. Asia Pacific ex Japan equities also fell in Q3 amid concerns over the Chinese economy while Chinese stocks experienced particularly sharp declines in August. The US economy continued to surprise with its resilience over the quarter.
As a result, US bond yields rose, with the 10-year government yield finishing at 4.53%, which compares to 3.82% initially. In the UK, 10-year gilt yields were relatively unchanged, ending Q3 at 4.41% compared to 4.40% at the start, as inflation finally showed signs of falling. After rising sharply against the US dollar in the first couple of weeks of the quarter, Sterling then fell steadily against it to finish weaker at the end of Q3. The pound was volatile versus the euro over the quarter and finished Q3 slightly weaker. Commodities rose sharply over the quarter, driven by significantly higher energy prices after Russia and Saudi Arabia cut oil production. Infrastructure fell by around 5% over the quarter while UK property declined slightly.
Economic background
Quarterly UK GDP growth was 0.2% in Q2 2023, which compares to 0.3% the previous quarter. Elsewhere, US GDP increased at an annual rate of 2.1% in Q2 2023, following an increase of 2.2% in Q1 2023. In the Eurozone, GDP grew on a quarterly basis by 0.3% in the second quarter of this year after no growth in the previous quarter. Recent consumer confidence numbers from the US have been encouraging. Confidence levels are lower in the UK and Eurozone but increasing. Economic data from China, meanwhile, continues to be worse than expected. Headline inflation fell over Q3, with rates of 6.7%, 3.7% and 5.2% registered in August in the UK, US and Eurozone respectively. The corresponding core inflation rates were 6.2%, 4.3% and 5.3%. Inflation in August was lower in Japan (3.2%) and Switzerland (1.6%) and just 0.1% in China.
The Bank of England, Federal Reserve and European Central Bank continued to raise interest rates over the quarter, although by less than in recent quarters, to 5.25%, 5.25-5.5% and 4.5% respectively. Labour markets generally remain tight, although unemployment has stopped falling in the US and is now edging up in the UK. US wage growth has been falling but remains over 5%. Wage growth has also remained high in the UK, at around 8% and is accelerating in the Eurozone.
In conclusion, the third quarter of 2023 has been marked by some positive economic indicators in the United Kingdom. While challenges persist, the nation's ability to adapt, innovate, and implement effective policies has positioned it for continued growth. As we move forward, staying informed and agile will be key in navigating the evolving economic landscape.