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In our Market Insights, Prosperity Investment Management examines the latest developments across the globe's biggest financial markets - providing you with all the latest information you need to know.
UK to suffer slowest growth of all rich nations next year, states OECD
The economic outlook for the UK appears challenging, with projections of sluggish growth for 2024 and 2025 according to the OECD.
The organisation anticipates a GDP growth of 0.4% in 2024, lower than many other advanced economies, attributing this to persistent effects of high interest rates and inflation.
In contrast, North America, especially the US, is expected to lead growth among advanced nations, with a forecasted GDP growth of 2.6% in 2024. Europe is also expected to see a rebound in growth after a sluggish 2024.
The OECD's assessment points to signs of strength in certain emerging economies, such as China, where growth projections have been slightly revised upward due to improved performance.
In terms of inflation, the OECD predicts a decline in headline inflation among its member nations, with an expected drop to 5% in 2024 from 6.9% in 2023, and a further decrease to 3.4% by 2025, approaching the target of around 2% in most major economies.
Overall, while challenges persist, there are indications of a gradual global economic recovery, with central banks' efforts to manage inflation showing some effectiveness.
Eurozone inflation steady at 2.4%, keeping June rate cut in play as economy returns to growth
In April, price increases in the euro area remained stable at 2.4%, according to preliminary data released last week.
This figure aligns with economists' expectations, with inflation holding steady at 0.6% on a monthly basis. Despite a minor uptick in December attributed to energy costs, this marks the seventh consecutive month with headline inflation below 3%.
Core inflation, which excludes volatile components like energy and food, saw a slight decrease to 2.7% from 2.9% in March, mainly influenced by lower energy prices.
Notably, services, a crucial indicator for the European Central Bank (ECB), experienced a cooling in price increases to 3.7% from 4%.
In terms of economic activity, gross domestic product (GDP) expanded by 0.3% in the first quarter of the year, slightly surpassing economists' expectations. However, there was a revision in GDP for the fourth quarter of 2023, shifting from no growth to a 0.1% contraction, indicating that the eurozone faced a technical recession in the latter half of the previous year.
With mounting market expectations, there's anticipation for the ECB to initiate interest rate cuts at its upcoming monetary policy meeting on June 6.
Current money market pricing suggests a nearly 70% likelihood of a rate reduction in June, with even higher expectations for cuts in July or September.
Several ECB members expressed their anticipation for a rate cut in June, citing the necessity to prevent a significant slowdown in the eurozone economy and highlighting risks posed by oil prices and Middle East volatility.
US warns rates will stay high as it continues to battle inflation
The US Federal Reserve has once again opted to maintain interest rates at their current levels, citing a lack of further progress in addressing inflationary pressures.
This decision keeps the Fed's key rate steady within the range of 5.25% to 5.5%, where it has remained since July of the previous year.
By keeping borrowing costs elevated, the Fed aims to temper economic activity and mitigate the forces contributing to price increases. However, with inflation proving more persistent than anticipated, the central bank faces uncertainty regarding its next steps.
Analysts who previously anticipated rate cuts earlier in the year have had to revise their forecasts, with some even considering the possibility of a rate hike. Fed Chairman Jerome Powell, speaking at a press conference following the announcement, expressed scepticism about the likelihood of a rate increase, emphasising the Fed's desire for greater assurance that inflationary pressures are abating before considering a reduction.
In the United States, consumer prices rose by 3.5% over the 12 months leading up to March, though this figure has decreased significantly from the 9.1% rate observed in June 2022. Despite this decline, inflation remains above the Fed's target of 2% and has shown a slight upward trend in recent months.
In its statement, the Fed highlighted the ongoing challenge of bringing inflation back to its target, acknowledging the lack of significant progress in this regard.
The central bank has maintained interest rates at their current levels since July of the previous year, following a series of aggressive rate hikes from near-zero levels in March 2022. These higher interest rates translate into increased costs for mortgages, car loans, business loans, and other forms of debt for consumers and businesses alike.
The Fed also disclosed its previously discussed plans to slow the pace of reducing its holdings of US Treasuries, which were accumulated as part of stimulus efforts to support the economy during the onset of the pandemic in 2020. The process of reversing these stimulus measures began two years later.
