Although UK equity markets ended December – and 2023 – in positive territory, their performance compared to most major overseas markets was relatively muted overall.
- UK rates remained unchanged at 5.25%
- The UK economy contracted by 0.1% in Q3 2023
- Inflation continued to decline
A subdued end to the year: although UK equity markets ended December – and 2023 – in positive territory, their performance compared to most major overseas markets was relatively muted overall. The FTSE 100 Index rose by 3.7% during December and by 3.8% over the year; meanwhile, the FTSE 250 Index climbed by 8% over December and by 4.4% over 2023. Having risen as high as 4.75% during 2023, the yield on the benchmark UK gilt ended 2023 at 3.54%, dampened by expectations of lower interest rates. The pound strengthened during 2023 against the US dollar, rising from 1.21 to 1.27.
“Speculation over the possibility of rate cuts during 2024 appears to have risen”
Interest rates unchanged: the Bank of England (BoE) held its key interest rate at 5.25% and policymakers gave no indication that rate cuts are in the offing. Nobody voted for a cut; six members of the Monetary Policy Committee voted to hold rates, and three voted for an increase of 25 basis points. Nevertheless, although BoE Governor Andrew Bailey emphasised that interest rates are not set to fall until inflation has returned to its 2% target, speculation over the possibility of rate cuts during 2024 appears to have risen, intensified by lacklustre economic data and signs of a slowdown in wage growth.
Recession fears on the rise: although initial estimates suggested that the UK economy had stagnated between July and September, updated calculations released during December showed that the economy had shrunk by 0.1% during the third quarter. The news raised concerns over the possibility of recession that were exacerbated by a month-on-month economic contraction of 0.3% in October.
Inflationary pressures continue to ease: lower prices for transport, recreation, and food curbed consumer price inflation , which fell from 4.6% year on year in October to 3.9% in November, fuelling hopes that central bank officials could decide to bring down interest rates earlier than expected. UK job vacancies continued to fall during the three months to October, and growth in average earnings (excluding bonuses) slowed to a rate of 7.3%.
Consumer confidence ticks up: confidence amongst UK consumers showed signs of a “modest improvement” in December, according to GfK’s Consumer Confidence Index , although sentiment remained negative overall. In comparison, Lloyds Bank reported that business confidence in the UK fell to a five-month low during December, posting its biggest one-month decline since August 2022 and reflecting caution towards wider economic prospects.
To view the series of market updates through December, click here
