We started 2022 with renewed Covid-19 restrictions as the Omicron variant hit Wales.
While there is no doubt there will remain a degree of uncertainty regarding Covid-19 during the year ahead, and this will create challenges, particularly for key workers, those shielding and businesses impacted by the tightening of restrictions, there remains reason to be optimistic about the year ahead.
Resilience & recovery
If there is one thing the last couple of years has proved, it’s the resilience of Welsh businesses.
There are now 3,000 more businesses registered in Wales than there were in 2019, with companies having adapted and sought out new opportunities despite fast-changing circumstances and regulations (1).
To give an industry- specific example, 80% of the firms run by our colleagues in the legal sector, which interacts with almost every other sector of the Welsh economy, have exceeded their fee targets in at least one practice area (2).
Personal finances are also healthy, with employment having recovered to the level immediately prior to the pandemic and average weekly earnings in Wales up from £534 in 2019 to £562 in December 2021 (3). Consumer confidence has been buoyed not only by rising earnings, but by increases in house prices, which have risen at the fastest rate of any region in the UK over the past year, gaining an average of 14.5% and breaking through the £200,000 average house price milestone (4)
The continued presence of Covid-19, alongside high inflation and the gradual increase of interest rates, will continue to create challenges and uncertainty for the Welsh economy. However, we see no reason to be overly pessimistic or for the recovery we have seen over the past 12 to 18 months to be derailed.
In the near term, the Welsh government has announced a number of financial packages for businesses directly impacted by the tightening of restrictions, while strong consumer demand, bolstered by substantial excess savings built up by during lockdowns, should continue to support local businesses.
Inflation is likely to remain high in 2022, coming down towards the end of the year as supply constraints ease and consumers increasingly switch back to spending on services rather than just goods (Covid restrictions permitting). In the meantime, businesses are likely to see increased demand for higher wages, as the supply of labour falls and inflation eats into employees’ pay packets.
However, with such a rapid spike after so many years of record low inflation, it is easy to forget a small amount of well-controlled inflation is a sign of a healthy economy.
In December, the Bank of England announced a small interest rate rise, bringing the rate at which banks can borrow up to 0.25%. Provided inflation remains high and the UK economy stable, we expect further gradual interest rate rises this year. We are not particularly concerned about this prospect at present, despite the short-term volatility it may cause for investment markets.
Interest rates are likely to remain very low by historic standards for some time, while most Welsh households and businesses will be provided a degree of protection by the widespread prevalence of fixed rates for much lending, particularly mortgages.
As with the local economy, although we remain alive to the uncertainty and risk still out there, we are cautiously optimistic with regard to the wider investment outlook.
We do see a likelihood for increased volatility as we navigate Covid-19, inflation and interest rate rises, but we do not believe these factors will prove fatal for the continuing economic recovery.
Furthermore, globally companies remain healthy, with the pandemic-induced recession of 2020 proving to have acted more to repair balance sheets than stretch them in many cases. In addition, although we expect it to fade over the coming years, government and central bank support has been hugely influential in supporting asset prices.
Clients may be pleasantly surprised to learn many of the world’s leading stock indices ended 2021, and began 2022, at all-time highs.
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