The economy in focus – a look back at a year of change and a view on what’s coming next

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Wherever you get your news from, between war and a spiralling cost of living crisis, things can sometimes feel a bit doom and gloom. But it can be easy to forget that we’ve been in this situation before and know what recovery looks and feels like; with challenging times usually providing opportunity over the longer term. So, if we look at why the economy has contracted over the last 12 months, what does it tell us?

Well, we can look back to the start of 2021 to trace a starting point. The global economy was beginning to recuperate post-Covid-19. An increase in demand for energy from Asia as their manufacturing capabilities began to recover, together with a historically cold winter in 2020, combined to create a global increase in the cost of energy.

As the wholesale price of gas climbed, lots of smaller suppliers in the UK, unable to trade because they just didn’t have the financial reserves, went to the wall.

Alongside this, a range of fiscal stimulus measures like quantitative easing, initially introduced after the financial crisis in 2008, were also withdrawn by central banks across the globe so they could recover from the economic stress caused by Covid-19.

The impact of war on the global economy

The Russian invasion of Ukraine in February 2022 caused an even bigger spike in energy prices. As one of the world’s major oil and gas producers, Russia reduced their supply at a time when demand was already increasing enormously with oil prices rising to over $120 a barrel in late February.

At the same time, with Ukraine being one of the world’s major food producers exporting more than $27 billion in agricultural products in 2021 alone, the invasion has hugely reduced the supply of these staple goods and increased their cost all over the world.

Climbing energy prices and a dip in availability of food basics amplified an already rising rate of inflation, which in turn saw banks increase their interest rates to try and temper consumer spending. And with spiralling costs of food and energy, we’re seeing inflation rise to a 40-year high in the UK, with the expectation that this will hit 10% by the end of the year.

What does this all mean?

Well, history tells us that despite households reducing their spending because of the increased cost of living and borrowing, we should expect inflation to flatten out and then reduce over the next couple of years. The Bank of England stated their hope that inflation will revert to a much more manageable 2.5% in the near future.

With the level of volatility in the market, all caused by the perfect storm of incidents above, it’s easy to feel somewhat nervous.

Market volatility can look scary, especially when we review the NASDAQ Index in North America, which is heavily weighted towards tech, with companies like Apple, Microsoft and Google relying on components and manufacturing in Asia. But the team here at Milestone are monitoring events closely and keeping in close communication with our investment partners to track market movements and their causes.

Keep calm and carry on

I’m confident that if history has taught us anything about volatile markets, it’s that the best course of action is to sit tight and wait for some common sense and stability to return. Are companies like Apple, Microsoft and Google going to stop making a profit? I don’t think so and neither do our partners. Temporary volatile periods in markets are normally followed by sustained periods of growth.

At Milestone, our approach has always been based on best value and predictable growth in the longer term. We always knew the demand for oil and gas would reduce as the world looks for more sustainable energy sources, and while Russia’s new status as international aggressor has shortened this timeline, we would have reached this point at some point soon anyway and have been preparing for it.

Our portfolios are spread across the globe and have exposure to lots of different sectors. The old saying ‘don’t keep all your eggs in one basket’ has never been more appropriate than it is right now!

Of course, trading conditions are difficult across all sectors, but this is being caused by greed and fear. In the words of Warren Buffet, “When all around you are rejoicing, be fearful. When all around you are fearful, rejoice”. There is a sale on shares across the globe right now and here at Milestone we’re constantly monitoring our clients’ portfolios and working to deliver long-term growth at minimum cost.

As things stand, the market and central banks look concerned. But that doesn’t mean we need to be. Core inflation (excluding energy and food) will come down as the drivers that pushed it up are all waning. But the uncertainty looks to be with us until markets see proof that this is true. This means traditional assets, such as government bonds and equities, will take some time to settle down.


Until central banks make their minds up, markets are going to struggle to make up theirs. But we’ve made up ours – staying diversified in volatile market conditions is the right thing to do.


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