UK’s Economic Landscape in Q4 2023: Inflation Rates Fall and GDP Growth Improves
As the UK enters the fourth quarter of 2023, there are several positive developments in the country’s economic landscape. Despite inflation remaining higher than the target rate of 2%, the Consumer Price Index (CPI) has fallen to 6.7% from a peak of 11.1% in October 2022. This decline brings some relief to consumers as the cost of living becomes relatively more stable.
The base rate currently stands at 5.25%, and while there have been hints from Bank of England officials about a potential rate rise, the central bank decided to pause at the last Monetary Policy Committee meeting. Furthermore, it is now unlikely that there will be further rate hikes beyond this final one.
Revised economic data from the Office for National Statistics reveals that the UK has experienced faster growth than both France and Germany since the end of 2019. Although growth is still lackluster, the UK’s economy has grown by 1.8% since the beginning of the COVID-19 pandemic, compared to the previous estimate of a 0.2% contraction. Additionally, the economy grew by 0.3% in the first quarter of 2023, surpassing the previous estimate of 0.1% growth.
Despite these positive indicators, concerns have been raised about the cancellation of the HS2 project, which adds weight to the argument that the UK is becoming a less certain place to invest. However, it is important to note that many of the country’s economic challenges are global in nature, affecting other countries as well.
The recent decline in UK shares can be attributed to the turmoil in the bond markets, which has pushed up the price of the US Dollar and lowered the price of oil. This bond market issue is not exclusive to the UK and has caused UK 30-year borrowing costs to reach their highest level since 1998, with the yield on 30-year government bonds at 5.115%, according to Refinitiv.
These developments have two significant implications. Firstly, the movements in the bond market suggest that inflation will persist for a longer duration, keeping interest rates high even if they are near their peak. Secondly, both the UK and other governments have limited room for tax cuts or increased spending, making the task of generating economic growth even more challenging than previously assumed.
It is important to keep these factors in mind when considering investments, remembering that past performance does not guarantee future returns.
In other news, Tesco, the UK’s largest grocer, has reported positive interim results, leading to a sharp rise in its shares. The company witnessed a 7.8% increase in like-for-like retail sales, with volume and sales mix trends surpassing expectations. As a result, Tesco’s retail adjusted operating profit rose by 13.5% to over £1.4 billion. Tesco bank also saw its operating profit increase by 25% to £65 million, primarily driven by strong income growth.
In terms of statutory figures, revenue rose by 5% to £34.1 billion, and operating profit more than doubled to nearly £1.5 billion. However, this significant increase is largely due to the absence of a £626 million impairment charge from the comparative period. Tesco has also managed to expand its market share by 30 basis points, with gains both online and in physical stores.
Furthermore, Tesco’s net debt has improved by £605 million since the end of the previous year, resulting in a net debt/EBITDA ratio of just 2.3x. The company has also announced an interim dividend per share of 3.85p, in line with its dividend policy. Additionally, Tesco’s plan to buy back £750 million of shares by April 2024 is progressing well, with £503 million of shares already purchased in the first half of the year.
With these positive results, Tesco now expects to generate retail free cash flow of between £1.8 billion and £2 billion this year, surpassing its medium-term guidance range of £1.4 billion to £1.8 billion. CEO Ken Murphy highlighted the strong performance in the first half of the year and expressed optimism about food inflation decreasing in the second half.
AllianceBernstein analyst William Woods praised Tesco’s results, stating that concerns about sector profitability and deflation are not significant risks.
Aviva, the insurance company, has also experienced a boost in its shares after being upgraded from ‘buy’ to ‘hold’ by Jefferies, with a price target of 480p. Jefferies forecasts that Aviva will deliver a best-in-class capital return yield, supported by excess capital and strong free cash flow compared to its peers. The analysts expect Aviva’s earnings to shift towards a capital-light business, improving its prospects as market conditions improve.
Jefferies predicts that Aviva could potentially return £5.3 billion of capital to shareholders between 2023 and 2026
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