In our Market Monday 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 recession may already be over, states Bank of England chairman
Based on the statements from the Bank of England's governor, Andrew Bailey, it appears that there are indications suggesting that the UK recession may already be ending.
With new signs of an upturn in the economy. Bailey highlighted that by historical standards, this recession is notably weak.
Official figures from the Office for National Statistics (ONS) showed that the UK economy contracted by 0.3% between October and December of the previous year, following a previous contraction between July and September, indicating a recession as defined by two successive quarters of economic decline.
However, despite these indicators of potential economic recovery, the Bank of England signalled that it is not considering an immediate interest rate cut. Instead, it is waiting for further evidence, particularly in areas such as wage growth and job vacancies, to confirm whether inflation has decisively turned.
Bailey also mentioned the possibility of inflation being influenced by changes in energy prices, with expectations of a decrease in the price cap on UK electricity and gas bills from April.
While this might temporarily bring overall inflation down to the Bank of England's 2% target, Bailey cautioned that inflation could rise again over the year.
Overall, while there are optimistic signs of an economic upturn and the recession potentially coming to an end, the Bank of England is adopting a cautious approach, awaiting more evidence before making significant policy decisions.
Israel's economy shrinks more than expected due to ongoing Gaza conflict
Official data reveals a significant contraction in Israel's economy following the conflict in Gaza, surpassing earlier expectations.
Gross Domestic Product (GDP), a crucial indicator of economic well-being, plummeted by 19% annually in the fourth quarter of 2023, marking a 5% decline from October to December alone. The Central Bureau of Statistics attributed this decline directly to the outbreak of conflict on October 7.
Analysts expressed surprise at the severity of the economic downturn, as forecasts had anticipated a milder annualised decline of 10.5%. The Central Bureau of Statistics outlined how the war severely impacted various economic sectors, leading to reduced spending, travel, and investment at the year's end.
Private spending saw a staggering 26.3% decrease, while exports and investment in fixed assets, particularly in residential buildings, experienced notable declines of 18.3% and 67.8%, respectively.
The construction industry suffered from labour shortages due to military mobilisation and a decrease in Palestinian workers. Conversely, government spending surged by 88.1%, primarily attributed to war-related expenses and compensation for affected businesses and households.
Despite the sharp GDP contraction in the final quarter, Israel's economy managed to grow by 2% for the entire year. However, prior to the October 7 attacks, it had been projected to expand by 3.5%.
Furthermore, the conflict's repercussions extended beyond Israel, affecting regional trade dynamics. Houthi rebels, supported by Iran, targeted cargo ships traversing the Red Sea en route to the Suez Canal, disrupting global trade routes.
Egyptian President Abdel Fattah al-Sisi disclosed that these attacks had slashed Suez Canal revenue by an estimated 40% to 50% for the year. The Red Sea, a vital artery for maritime trade, typically handles nearly 15% of global seaborne commerce.
Africa’s largest economy is battling a currency crisis and soaring inflation
Nigeria finds itself entrenched in one of its most severe economic crises in recent memory, with annual inflation nearing 30% and its currency experiencing a rapid decline, sparking widespread outrage and protests nationwide.
On Monday, the Nigerian naira hit a historic low against the U.S. dollar on both the official and parallel foreign exchange markets, plummeting to nearly 1,600 against the greenback on the official market, a stark drop from around 900 at the beginning of the year.
In response to the escalating crisis, President Bola Tinubu announced plans on Tuesday for the federal government to mobilise at least $10 billion to bolster foreign exchange liquidity and stabilise the naira, as reported by numerous local media outlets.
Since assuming office in May 2023 amidst a struggling economy, President Tinubu has pledged a series of reforms aimed at restoring stability. However, the unified approach to Nigeria's exchange rates, along with the adoption of market-driven mechanisms to determine the exchange rate, has led to a significant depreciation of the currency. Additionally, adjustments in how the currency's closing rate is calculated by the market regulator have further contributed to de facto devaluation.
Years of stringent foreign exchange controls have exacerbated pent-up demand for U.S. dollars, coinciding with declines in overseas investment and crude oil exports, key pillars of Nigeria's economy. Despite being Africa's largest economy with a population exceeding 210 million, Nigeria heavily relies on imports to sustain its rapidly growing population.
Meanwhile, inflation continues its upward trajectory, with the headline consumer price index soaring to 29.9% year-on-year in January, marking its highest level since 1996. The surge is primarily fueled by a persistent increase in food prices, which spiked by 35.4% last month compared to the previous year.
The escalating cost of living and economic challenges have triggered protests nationwide over the weekend. The sharp depreciation of the currency compounds the adverse effects of government reforms, such as the removal of gas subsidies, resulting in a threefold increase in gas prices.
In our Market Monday 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 economy falls into recession after public spending cuts take effect towards closing stages of 2023
The UK's economy fell into recession in late 2023, with two consecutive quarters of contraction, reflecting a concerning trend.
The larger-than-expected 0.3% contraction between October and December, following a previous contraction between July and September, underscores the challenges faced by the economy.
Rishi Sunak's pledge to grow the economy has come under scrutiny in light of these figures, as the economy's performance has fallen short of expectations. Despite a modest annual growth of 0.1% for 2023, it remains the weakest figure since the aftermath of the 2008 global financial crisis.
The situation in the UK is not isolated, as other major economies, such as the European Union and Japan, have also experienced economic pressures. Factors contributing to the UK's economic downturn include reduced consumer spending, strike action in the health sector, and lower school attendance rates.
The Office for National Statistics (ONS) highlights a slowdown across various sectors, including construction and manufacturing, indicating a broad-based economic weakness. Moreover, forecasts for public finances have worsened due to increased interest costs on government borrowing.
The Bank of England's decision to maintain interest rates at 5.25% since August suggests a cautious approach to managing inflationary pressures amidst the economic slowdown.
Overall, these developments underscore the need for careful economic management and potential policy adjustments to stimulate growth and address the challenges facing the UK economy.
US inflation slows by less than expected
Price increases in the US moderated last month but not as much as expected, as higher housing and food costs offset a decline in petrol prices.
The latest report from the Labor Department indicates that price increases in the US moderated slightly but not as much as expected in the previous month.
Despite a decline in petrol prices, higher housing and food costs offset these declines. Annual inflation, measured at 3.1%, was lower than the previous month's 3.4% but still higher than the anticipated 2.9%.
This data suggests that authorities are still grappling with inflationary pressures, as inflation remains elevated. The news of inflation not falling as much as expected led to a downturn in US financial markets, dispelling hopes of early interest rate cuts by the US central bank to address the issue.
Although inflation spiked significantly in June 2022 due to factors like surging oil prices amid the Ukraine conflict, many of the initial supply chain disruptions have improved, and demand has moderated since then, partly in response to the Federal Reserve's tightening of borrowing costs. However, price increases, particularly for services, continue to persist.
These ongoing price rises have had a tangible impact on incomes and have contributed to dissatisfaction among voters, especially in the lead-up to the presidential election in November.
While some areas like grocery prices saw more modest increases, other sectors such as restaurant prices, car insurance, and personal care experienced significant jumps in costs.
The core inflation rate, which excludes volatile food and energy prices, remained unchanged at 3.9%, indicating that underlying inflationary pressures persist across the economy.
Japan’s economy unexpectedly slips into recession, as weak domestic demand takes hold
The latest provisional government data reveals that Japan's economy slipped into a technical recession, experiencing unexpected contraction once again in the October-December period.
High inflation has constrained domestic demand and private consumption in what is now the world's fourth-largest economy.
This development presents challenges for both Bank of Japan Governor Kazuo Ueda, who is considering interest rate normalisation, and Japanese Prime Minister Fumio Kishida, who may need to reassess fiscal policy support.
The fourth-quarter contraction of 0.4% compared to a year ago, following a revised 3.3% slump in the July-September period, was well below economists' expectations.
Additionally, the GDP deflator stood at 3.8% on an annualised basis for the fourth quarter. The economy also shrank 0.1% in the fourth quarter compared to the previous quarter, further below expectations for expansion.
Private consumption, a significant driver of economic activity, declined 0.2% in the fourth quarter compared to the previous quarter, contrary to expectations for expansion.
Although inflation has been gradually decelerating, "core core inflation," which excludes food and energy prices, has surpassed the BOJ's 2% target for 15 consecutive months. Despite this, the BOJ has maintained its negative-rate regime, hoping that sustained wage growth would stimulate consumer spending.
However, the weaker-than-expected GDP data calls into question the BOJ's strategy of relying on domestic demand-driven inflation. Many market observers anticipate the BOJ may abandon its negative rates regime at its April policy meeting, particularly if the annual spring wage negotiations indicate significant wage increases.
Yet, the persistent high inflation and its impact on domestic consumption may strengthen the case for maintaining looser monetary policy for an extended period.
In our Market Monday 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.
House prices rise highest for a year in January
House price rises in January were the highest for a year as mortgage rates continued to ease.
A slowdown in inflation and a recently buoyant jobs market also helped push property prices up. The UK's biggest mortgage lender, Halifax, said a typical home now costs £291,029 on average, a 2.5% jump from January the previous year.
The figures come as major housebuilder Barratt announced it would buy rival Redrow in a deal worth £2.5bn. Housebuilders have struggled over the past couple of years as higher interest rates dented demand and construction costs rose in conjunction with this.
But expectations of rates being cut this year, with inflation - the pace of price rises - slowing down, has led to increased confidence in the housing market, Halifax said in a recent report.
However, it warned that while house prices had risen, interest rates still remained relatively high compared with the historic lows seen in recent years, making it more expensive for prospective buyers to borrow. The lender also stated that first-time buyers faced average deposits of £53,414.
Price data is based on its own mortgage lending, which does not include buyers who purchase homes with cash, or buy-to-let deals. Cash buyers account for about a third of housing sales.
First-time buyers and homeowners looking to remortgage properties have faced higher borrowing costs in recent months. The Bank of England has recently held interest rates at a 16-year high of 5.25% since August 2023, in a bid to try to slow down the rapid pace of general price rises across the country.
A typical two-year fixed mortgage rate would charge 5.57% interest on Tuesday, while a five year deal would charge 5.22%, according to data from available data. This is down from a peak of 6.86% for a two-year deal in July last year, it also stated.
Germany’s economic outlook remains shaky amidst recent data
Germany’s economy has been struggling and the latest data has provided little hope for improvement as the nation looks to continue tackling economic woes.
Multiple key 2023 data points, namely factory orders, exports and industrial production, were out last week and indicated a weak end to the year that saw questions about Germany being the “sick man of Europe” resurface to the front pages.
The data confirm that German industry is still in recession with multiple economists predicting continued economic downturn.
Industrial production declined by 1.6% in December on a monthly basis, and was down 1.5% in 2023 overall compared to the previous year. Exports – which are a major cornerstone of the German economy – fell by 4.6% in December and 1.4%, or 1.562 trillion euros ($1.68 trillion), across the year.
Meanwhile, factory orders data seemed promising at first glance as it reflected an 8.9% increase in December compared to November.
But this growth is not a source of comfort for many economists, with some explaining that it is thanks to several large-scale orders, which tend to be highly volatile. Orders excluding large-scale orders actually fell to a post-pandemic low.
For 2023 overall in comparison to the previous year, factory orders were down 5.9%.
This figure sits relatively in line with how Germany’s economy fared in 2023, when it contracted by 0.3% year-on-year, according to data released by the federal statistics office last month.
The data also showed a 0.3% decline of the gross domestic product in the fourth quarter, but Germany still managed to avoid a technical recession, which is characterised by two consecutive quarters of negative growth.
This is due to the statistics office finding that the third quarter of 2023 saw stagnation rather than contraction. But should the economy contract as expected in the first three months of 2024, Germany would indeed fall into a recession.
Eurozone inflation continues to cool
The most recent inflation figures for the 20-nation Eurozone continue to show positive trends, yet there has been a recent uptick in bond yields due to investor expectations that the European Central Bank (ECB) may postpone rate cuts.
Despite a slowdown in both headline and core inflation, there has been no deceleration in the inflation of labour-intensive services, leading to concerns among investors that progress in reducing inflation may be hindered by a tight labour market – a concern shared by the ECB.
According to reports from the European Union (EU), consumer prices rose by 2.8% compared to a year earlier in January, but fell by 0.4% from the previous month. Core prices, which exclude volatile food and energy prices, saw a 3.3% increase, the lowest since March 2022, and dropped by 0.9% from the previous month.
Notably, prices of non-energy industrial goods rose by only 2% compared to a year earlier and saw a significant decrease of 2.4% from the previous month.
While these figures may seem promising, investors are concerned by the fact that service prices have remained stable, showing a year-on-year increase of 4%, consistent with the figures from December and November.
This lack of deceleration in service prices is worrisome because services typically rely heavily on labour, and wages are rising sharply. As a result, it is expected that the ECB will hesitate to cut interest rates until wage pressures ease.
Recent data has also indicated that despite a sharp rise in shipping costs, the cost of shipping a container from China to Europe is now only about one third of what it was in early 2022. This development has had a noticeable impact on economic performance, suggesting that the inflationary effects of the current crisis are unlikely to resemble those of the pandemic period.
Crisis-hit Chinese property giant, Evergrande, ordered to liquidate
A court in Hong Kong has ordered the liquidation of debt-laden Chinese property giant Evergrande in a recent ruling.
Judge, Linda Chan, declared the order after the troubled developer repeatedly failed to come up with a plan to restructure its debts.
The firm has been the epitome of China's real estate crisis after accumulating more than $300bn (£236bn) of debt.
But it is unclear how far the Hong Kong ruling will hold sway in mainland China. The property giant, which has been in hot water with its creditors for the last two years, filed a request for another three months' leeway at 4pm on Friday.
The slow burn crisis at Evergrande has sent shockwaves through the investment community, with its potential impact likened to the collapse of Lehman Brothers at the start of the financial crisis.
China's property sector remains fragile as investors wait to see what approach Beijing will take to the court's move.
The decision is likely to send further shockwaves through China's financial markets at a time when authorities are trying to curb a stock market sell-off in an attempt to regain confidence in the economy.
Evergrande shares fell by more than 20% in Hong Kong after the announcement, before trading was suspended the same day.
The liquidators will look carefully at Evergrande's overall financial position and identify potential restructuring strategies. That could include seizing and selling off assets, so that the proceeds can be used to repay outstanding debts.
However, Beijing may be reluctant to see work halt on property developments in China, where many ordinary would-be homeowners are waiting for apartments they have already paid for as a result of the crisis.
Evergrande has come to firmly represent the ongoing trouble of China's property boom and bust, borrowing heavily to finance the building of forests of tower blocks aimed at housing the millions of migrants moving from rural areas to cities. It ran into trouble, and defaulted on its debts in December 2021.
Bank of England inching closer to interest rate cuts
The Bank of England has held interest rates at 5.25% but indicated it is edging towards cutting borrowing costs.
In its latest meeting, the Bank said it had discussed cutting rates, with inflation set to fall quickly this year. But the Bank's governor, however, said it would wait for firm evidence that inflation was under control before looking to act upon this information.
For the first time since the 2020 Covid pandemic, a key Bank of England policymaker voted for an immediate cut. However, whilst some voted to cut rates to 5%, two members of the Monetary Policy Committee (MPC) backed an increase to 5.5%. The remaining six members of the committee voted to keep rates unchanged.
It is the first time there has been a three-way split on whether rates should rise, fall or be held since the 2008 financial crisis. The Bank of England has been raising rates steadily over the past couple of years to try to reduce inflation, with the last rate rise in August 2023.
Higher interest rates cool inflation by making borrowing more expensive, discouraging people and businesses from taking on debt to fund spending.
Inflation has fallen sharply from the 40-year peak observed in October 2022 and currently stands at 4%. The Bank is therefore battling to keep price growth at, or close to, its ongoing target of 2%.
It said in its latest inflation statement that the figure would fall back to that target between April and June this year - quicker than it had previously expected.
The Bank is expecting a slight rebound in inflation over the summer, and at the Bank's news conference, many stated that this would not be an ideal territory to explore rate cuts.
This further suggests that any rate cut may not come as quickly as many expect. There is concern among some economists that the fall in the inflation rate towards the Bank's target is false due to the cut in the energy price cap, and that inflation will rebound somewhat over the summer as global energy prices have picked up as a result.
In addition, the ongoing growth in pay remains strong, with the Bank's latest survey multiple companies pointing to a 5.4% rise in wage settlements this year.
Alongside this, the Bank's new forecasts indicate that keeping rates at their current level could therefore push a barely growing economy into an outright recession.
Federal Reserve holds interest rates at a 23-year high
Officials at the US central bank have left interest rates at a 23-year high, and said rate cuts are imminent as the economic situation continues to develop.
The decision from the Federal Reserve again kept the target range for its benchmark rate, which helps set borrowing costs for mortgages, credit cards and other loans, between 5.25%-5.5%.
That is sharply higher than two years ago, when the Fed started raising rates to fight inflation. Investors expect rate cuts this year. But exactly when the bank will start to reverse course is being closely watched, especially as a multitude of central banks in other countries, including the Bank of England which meets on Thursday, face similar decisions as a result.
At a press conference after the meeting, the Federal Reserve Chairman recently stated policymakers did not expect to cut rates in March, as some investors had been betting. Therefore, it has not raised interest rates since July, with this month's meeting marking the fourth without change.
Supporters of rate cuts argue that the soaring price increases that pushed the central bank to start raising rates in 2022 have slowed.
The inflation rate, which tracks the pace of price rises, was 3.4% in the US in December - and is even lower by some measures, starting to approach the 2% rate the bank considers healthy. Higher interest rates cool inflation by making borrowing more expensive, discouraging people and businesses from taking on debt.
As activity such as home purchasing and business expansion declines, the economy slows and the pressures pushing up prices ease.
Analysts now state the Federal Reserve will not want to leave that pressure on the economy indefinitely, for fear of triggering a recession as a result.
But while growth has slowed and some sectors such as housing have been hit,broadly speaking, the economy has remained unexpectedly resilient, relieving pressure on the Fed to act.
Growth in the final months of the year proceeded at a 3.3% annual rate, while the unemployment rate in December was 3.7%, near historic lows.
In December, forecasts showed that most members of the Fed's rate-setting committee expected rates to stand 0.75 percentage points lower at the end of this year.
UK economy growth forecasts cut drastically for the next two years
The UK economy will grow much more slowly than expected in the next two years as inflation takes longer to fall, with the latest government forecast.
Living standards are also not expected to return to pre-pandemic levels until 2027-28, the Office for Budget Responsibility (OBR) said. With this announcement coming as the chancellor announced tax cuts and a rise in benefits in his latest Autumn Statement.
The OBR, which is independent from the government, publishes two sets of economic forecasts a year, which are then used to predict what will happen to government finances in the upcoming period.
These are based on an educated prediction on what will happen, and therefore are subject to change. According to the watchdog, the UK will grow by 0.6% this year - a value considerably better than what it expected last autumn, when it predicted the economy would fall into recession and shrink.
However, it slashed its growth outlook to 0.7% in 2024 and 1.4% in 2025 - down from a previous forecast of 1.8% and 2.5%.
The OBR has warned that inflation - currently 4.6% - will only fall to 2.8% by the end of 2024, before eventually reaching the Bank of England's 2% target in 2025.
Previously it forecast inflation would easily beat the target next year. The economy has been struggling with a combination of high inflation, rising interest rates and flagging consumer demand, which is weighing on growth.
The Bank has put up interest rates a staggering 14 times since December 2021 to tackle soaring price rises, leaving them at 5.25% - a 15-year high - at its last two meetings.
And while rates for savers have risen, so have mortgage rates, putting pressure on households.
This has hit property prices, which the OBR said would fall by around 4.7% in 2024.
Turkey's central bank raises interest rates to 40%
Turkey's central bank has raised its main interest rate to 40% as part of a new campaign to tackle soaring inflation in the country.
The rise, from the previous rate of 35%, was much greater than expected. But Turkey's central bank suggested rates were approaching the level required to start lowering inflation.
Inflation hit 61.36% in October and is forecast to rise further and peak in May next year at around 70 to 75%.
While central banks globally have raised interest rates in an attempt to slow rising prices, President Recep Tayyip Erdogan had gone for an opposite approach, arguing that higher rates would cause prices to rise as a result.
However, since his re-election in May, his stance has now changed. The central bank, under its new chief Hafize Gaye Erkan, has been allowed to ramp up interest rates - in an attempt to increase the cost of borrowing and slow down price rises - from 8.5% to 40%.
The central bank's previous policy of cutting interest rates despite high inflation triggered a currency crisis in 2021. It led to the government to introduce a scheme to protect lira deposits from currency depreciation.
Global economic growth will slow in 2024, state banks worldwide
Global economic growth will slow even more in 2024 due to high interest rates, increased energy prices and a slowdown in the world's top two economies, a series of leading banks say.
Geopolitical risk and the wars in Ukraine and the Middle East could also contribute to a worsening global financial outlook, they warn.
Global growth could slow to 2.6% next year from 2.9% this year, according to a Reuters poll forecast. While economists generally agree the world will avoid falling into recession, they highlight the possibility of "mild recessions" in Europe and the UK.
Six out of ten respondents surveyed in the World Economic Forum’s latest Chief Economics Outlook stated that the global economy looked ‘sluggish’ and expect overall conditions in the economy worldwide to decline over the coming years.
Despite chances of a softer landing for the US economy, uncertainty over the Federal Reserve's moves on interest rates makes the future hard to predict.
This has recently been coupled with China's growth being expected to weaken as companies seek more cost-efficient locations for manufacturing globally.
However, some economists have painted a more optimistic picture, pointing to the better-than-expected performance of the global economy in 2023.
With this prediction based around the fact that GDP growth and employment have held relatively steady in major economies facing extreme inflationary pressures worldwide.
Economists predict Chinese economic output to decline
In a revolutionary turn, China’s rise as an economic superpower is predicted to be reversing. The biggest global story of the past half century may be coming to a close.
Its rise to the peak of the global economy in recent years saw its share of the global economy rise nearly tenfold from below 2% in 1990 to 18.4% in 2021. No nation had ever embarked on a rise so far, so fast in economic history.
Now many are seeing a reversal in this data. In 2022, China’s share of the world economy shrank by a noticeable amount. This year it will shrink more significantly, to 17%. That two-year drop of 1.4% is the largest since the 1960s.
China’s apparent economic decline could have a dramatic effect on world economic order. Since the 1990s, the country’s share of global GDP grew mainly at the expense of Europe and Japan, which have seen their shares hold more or less steady over the past two years.
Now, the gap left by China in the past two years has been filled mainly by the US and by other emerging nations.
Many are predicting the world economy will grow by $8tn in 2022 and 2023 to $105tn. China will account for none of that gain, the US will account for 45%, and other emerging nations for 50%.
China’s GDP is on track to decline in 2023, for the first time since a large devaluation of the renminbi in 1994.
China is one of the few economies suffering from deflation, and it also faces a debt-fuelled property crisis, which typically leads to a devaluation of the local currency as a result.
Investors are now pulling assets out of China at a record pace, adding further to pressure on the renminbi. Foreigners cut investment in Chinese factories and other projects by $12bn in the third quarter — the first such drop since records began.
More expensive services and food prices drive euro zone inflation in October
More expensive services and food prices were the main drivers of consumer price growth in the euro zone in October, data showed on Friday, as the EU's statistics office confirmed year-on-year inflation slowed sharply.
Eurostat said consumer inflation in the 20 countries using the euro decelerated to 2.9% year-on-year in October from 4.3% in September after prices rose 0.1% month-on-month.
Price rises in the services sectors, the biggest part of the euro zone economy, added 1.97 percentage points to the final year-on-year number and more expensive food, alcohol and tobacco added another 1.48 percentage points.
A sharp fall in energy prices subtracted 1.45 points from the final number while non-energy industrial goods added another 0.9 percentage points.
The European Central Bank wants to keep inflation at 2.0% over the medium term and has raised interest rates to record highs to slow down price growth, at the same time slowing euro zone economic growth.
The French government also reported a higher than expected rise in unemployment to its highest level in two years, with younger workers and women disproportionately affected.
However, in Germany there were signs of optimism, from investors at least, who are predicting an economic turnaround is imminent as inflation falls and interest rates stabilise. A collapse in housebuilding however could yet result in wider damage to the EU’s biggest economy and, as in France, danger signs are flashing in its unemployment statistics which continue to raise alarm.
The European Central Bank meanwhile is unlikely to offer relief in the form of interest rate cuts any time soon.
Worries on potential downturn in Canada's economy deepen if US growth fades
Canada's economy is flirting with recession and the downturn could worsen now that a period of rapid growth in the United States is expected to end, generating speculation that the Bank of Canada is shifting to interest rate cuts sooner than previously thought.
The Canadian central bank expects that the economy will avoid a recession, and forecast a growth of 0.8% for both the third and fourth quarters last month.
Since then, preliminary data has indicated a shallow economic contraction for a second straight quarter in the third quarter. Analysts say that if US economic activity slows, then the Canadian economy could shrink in the current quarter as a result.
The Bank of Canada has said it wants to cool the economy just enough to bring down inflation, but it does not want the resulting policy to be so restrictive that it triggers a deep recession as a result.
The Federal Reserve Bank of Atlanta's running estimate of fourth-quarter growth in the United States is at 2%, down from a rapid pace of 4.9% in the third. The BMO also now projects that U.S. growth will slow to 0.9% in the fourth quarter and that Canada's economy will shrink 1%.
The potential for further weakening in the Canadian economy is already evident in money markets. They have moved to price in a rate cut as soon as April after betting just last month that the benchmark rate would not be lowered from its current level of 5%, a 22-year high, before the end of 2024 and that the Bank of Canada may need to tighten further.
In our Market Monday 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.
US faces more interest rate rises to cool inflation
The US Federal Reserve chairman has said the central bank will continue to raise interest rates "if appropriate" as inflation remains "too high".
Jerome Powell told an annual gathering of central bankers that the pace of price rises had fallen from a peak.
However, it remains above the Fed's 2% target. In the latest data provided by the Federal Reserve, it;s chairman Jerome Powell said interest rates could rise further and stay higher for longer.
US inflation hit 3.2% in the year to July while the key interest rate is 5.25% - the highest in 22 years - and comes after 11 consecutive rate rises since early 2022.
Many in the Federal Reserve believe inflation has moved down from its peak, but it still remains too high.
This development comes as food and energy prices remained volatile, despite headline inflation falling from its high of 9.1% last year.
The latest data also points to the housing market, where activity had not cooled enough. After decelerating sharply over the past 18 months, the housing sector is showing signs of picking back up towards its previous target, but monetary policies will need to remain firm.
The newest available data also hinted that interest rates could begin to come down, if there were required changes in the labour market, where wage growth has continued as employers dished out higher wages to attract staff in a slowly shrinking workforce.
Higher wages, in theory, add to inflation, prolonging the need for higher interest rates.
IMF forecasts German economy to shrink towards the end of 2023
The International Monetary Fund forecasts the German economy will shrink in 2023, therefore making it the only G7 economy to contract this year.
Sticky inflation and three straight quarters of stagnating output have put Europe’s biggest economy into an unfavourable position towards the end of 2023.
The latest IMF forecast currently predicts the nation to be the only advanced economy to shrink this year — with a forecast contraction of 0.3% compared with an average rise of 0.9% for the 20 countries, including Germany, that use the euro currency.
A prolonged recession would be a disappointing outcome for an economy that, in the decade following the 2008-9 financial crisis, grew by an average of 2% a year, boasted a budget surplus for most of that period and saw its exports boom.
Inflation in Germany is running hotter than in most of its European neighbours. Consumer prices rose 6.2% in July compared with the same month in 2022, well above the 5.3% rate averaged across the euro area.
Falling private and public spending were the main drivers of the recession — defined as two consecutive quarters of declining output — that the country logged last winter.
The European Central Bank has hiked its main interest rate to a historic high of 3.75% to help curb rising prices. But a higher cost of borrowing has hit Germany’s residential building sector harder than most.
More than 40% of construction companies responding to a survey by the ifo Institute last month reported a lack of orders, up from 10.8% a year earlier, which provided further uncertainty about the country’s economic situation.
The wider industrial sector, which includes famed manufacturers such as Volkswagen and Siemens, has also taken a knock. Industrial output contracted 1.7% year-over-year in June, the latest official estimates show.
German business activity, spanning both services and manufacturing, dropped in August at the fastest pace since May 2020.
UK rents rise at highest rates since 2016
The rising cost of renting has again hit its highest level since comparable records began in 2016, with strong demand from tenants.
With fewer properties available to rent in many areas, the mismatch between supply and demand has pushed up costs for many people.
Prices paid by UK renters rose by 5.3% on average in the year to July, the Office for National Statistics said. The figures come as rising prices continue to squeeze household budgets across the UK.
The inflation rate, which can be used to measure how the cost of living has changed over time, fell to 6.8% in the year to July. Although this was down from 7.9% in June, it is still far above the Bank of England's ongoing target of 2%.
High demand from tenants at the same time as landlords reducing the number of available properties is one of the main reasons behind the rent increase.
The latest data from the Office for National Statistics (ONS) shows the UK average annual rent increase accelerated to 5.3% from 5.2% the month before.
There was a 5.5% increase in rents in London, which was the only region where house prices had fallen. This was observed as the sharpest increase in rent since comparable records began for London in 2006.
The same annual rent rise was recorded in the West Midlands as well as Yorkshire and the Humber.
There were even bigger rises for tenants in Wales, where the average was up 6.5% in a year, and in Scotland (up 5.7%). In Northern Ireland, where the data is collected in a different manner, there was a 9.2% increase in the year to May, although this was lower than a previous peak.
Official data on wages and inflation have led analysts to suggest that there could be further rises in the Bank of England's benchmark rate, which would only place further pressure on landlords and homeowners through relatively high mortgage rates.
Average UK house prices increased by 1.7% annually, down from a revised 1.8% rise in May, the ONS said, as the market cools as a result of the mortgage rate hikes.
China cuts key interest rate as economic recovery falters
China's central bank has cut one of its key interest rates for the second time in three months as the world's second-largest economy struggles to bounce back from the pandemic.
The People's Bank of China (PBOC) lowered its one-year loan prime rate to 3.45% from 3.55%. The country's post-Covid recovery has been hit by a property crisis, falling exports and weak consumer spending.
In contrast, other major economies have raised rates to tackle high inflation. The PBOC last cut its one-year rate - on which most of China's household and business loans are based - in July.
Economists had also expected the bank to lower its five-year loan prime rate, which the country's mortgages are pegged to. However, it was unchanged at 4.2%.
In a surprise move last week, short and medium-term rates were also cut.
China's economy has struggled to overcome several major issues in the wake of the pandemic, which saw much of the world shut down.In the same week, official figures showed China had slipped into deflation for the first time in more than two years.
That was as the official consumer price index, a measure of inflation, fell by 0.3% last month from a year earlier.
Meanwhile, official figures showed China's imports and exports fell sharply in July as weaker global demand threatened the country's recovery prospects.
Beijing has also stopped releasing youth unemployment figures, which were seen by some as a key indication of the country's slowdown.
In June, China's jobless rate for 16 to 24-year-olds in urban areas hit a record high of more than 20%.
US inflation continues to decelerate
Although headline inflation rebounded slightly in July, the underlying data suggests that US inflation continues to decelerate, providing welcome news for the Federal Reserve.
In July, consumer prices in the US were up 3.2% from a year earlier, higher than the 3% increase seen in June. However, prices were up only 0.2% from the previous month. In fact, in four of the last five months, monthly inflation was no higher than 0.2%.
The weakness of inflation is still largely driven by declining energy prices, which were down 12.5% in July from a year earlier and up only 0.1% from the previous month. Also, airline fares were down 18.6% from a year earlier and down 8.1% from the previous month.
On the other hand, food price inflation continues to be elevated, with food prices up 4.9% from a year earlier. Another source of underlying inflation was housing costs. These prices were up 7.7% from a year earlier, which was down from the previous month at 0.4%. In the past year, after a period of sharply rising home prices, these prices have stalled and even declined.
Over time, this will work its way into the shelter component of the consumer price index (CPI), thereby helping to reduce inflation during the second half of 2023. In fact, excluding shelter prices, the CPI was up only 1% in July from a year earlier. Excluding shelter and food, the CPI was unchanged from a year earlier.
Recall that, early in this era of high inflation, the majority of price increases were due to a surge in the costs of durable goods. That, in turn, was related to the pandemic-driven rise in demand for such goods across the US.
Now, after two years of declining demand for durables, prices of durables are declining. They were down 1.4% in July from a year earlier. Prices of nondurable goods were down 0.2% in July from a year earlier. Excluding food, nondurables prices were down 5.3%.
The services sector, on the other hand, accounts for plenty of inflation. Service prices were up 5.7% in July from a year earlier, heavily driven by shelter. The problem with service inflation is that the provision of services is highly labour-intensive.
With wages now rising faster than inflation, the danger is that the cost of providing services will continue to rise rapidly, thereby requiring companies to boost prices absent offsetting increases in productivity. The tightness of the labour market is one of the reasons for rising wages observed across the country.
In our Market Monday 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.]
Bank of England raises interest rates by a half point to 5%
The Bank of England has raised interest rates again by a half point to 5% as it ramps up its efforts to tackle stubbornly high inflation.
In what will be seen as a major move, the Bank’s monetary policy committee (MPC) increased rates for the 13th consecutive time to the highest level since 2008 as a spike in inflation takes hold.
Before the decision was announced, financial markets were evenly split on whether the Bank would vote for a half-point rise or a smaller quarter-point increase.
The latest rise in borrowing costs comes after figures on Wednesday showed inflation remained unchanged at 8.7% in May, driving expectations that the central bank would have no choice but to respond. Inflation was expected to fall to 8.4%, which would still have been well above the Bank’s recent 2% target.
The Bank said that it would continue to watch for persistent inflationary risks, and would push interest rates higher if absolutely necessary. Financial markets reacted to the rate hike by betting the central bank would be forced to raise its base rate above 6% before the Christmas period.
Experts warned the recent approach from the central bank to squeeze high inflation out of the system risked tipping Britain’s economy into recession, as tougher increases in borrowing costs only reduce households’ disposable income and drastically decrease consumer demand for goods and services.
The move comes as households across the country face a massive surge in mortgage repayments as the impact from earlier rate hikes trickles through to the cost of home loans, in a development heaping pressure on the government as millions of families struggle with soaring bills.
In a recent fortnight of turmoil in the mortgage market, high-street lenders and building societies had rushed to pull hundreds of cheaper deals on new home loans before the Bank’s latest decision, while pushing up the cost of a typical two-year fixed-rate mortgage above 6% – the highest level since Liz Truss’s disastrous mini-budget in the autumn of 2022.
European business activity slows in June as higher interest rates begin to bite back
Business activity growth in Europe slowed in June, pointing to a difficult end to the second quarter, according to preliminary data Friday.
The euro zone’s flash composite Purchasing Managers’ Index dropped to 50.3 in June from 52.8 in the previous month. This was below the 52.5 expected by analysts. A reading above 50 marks an expansion in activity, while one below 50 marks a contraction.
The European Central Bank has been increasing interest rates consistently for the past 12 months in an effort to bring down inflation. Higher rates can lead to higher costs for companies across the bloc, however, and so often become a drag on output.
On a country-by-country basis, data earlier in the day from Germany also showed a slowdown in Europe’s largest economy. The German flash composite PMIs fell to 50.8 in June from 53.9 in May. This was below market expectations.
Germany entered a technical recession in the first quarter of the year, after contracting 0.3% over the three-month period. In the final quarter of 2022, Germany’s economy shrunk by 0.5%.
It was a similar story in France, where the composite PMI sunk to 47.3 from 51.2 in May, well below the 51 expected. This was primarily due to weakness in the services sector.
Euro zone bond yields extended their falls following data, with the yield on the 2-year German bund dropping to 3.17% in early trade and the yield on the 10-year benchmark lowering to 2.36%. An economic slowdown tends to be negative for bond yields.
Turkey hikes interest rates as Erdogan looks for economic U-turn
Turkey has hiked its main interest rate from 8.5% to 15%, reversing one of President Recep Tayyip Erdogan's unorthodox economic policies.
The 6.5-point rise was far lower than economists were previously expecting, but it marked a major shift in policy by his new economic department brought in to tackle rampant inflation. Turkey's leader has until now insisted on keeping interest rates down for the foreseeable future.
Inflation is almost 40% and the country is firmly in the grip of a cost-of-living crisis. The head of Turkey's central bank, Hafize Gaye Erkan, was only recruited from the US this month in the wake of Mr Erdogan's re-election as president as he looked to make sweeping economic changes.
Her decision marks the first rise in interest rates since December 2020, after a turbulent period in which three central bank governors were fired in less than two years, as they sought to stick to orthodox economic policies.
Although the increase almost doubles Turkey's policy rate to 15%, it is far less than many economists had forecast. US-based investment bank Morgan Stanley had suggested it would go up to 20%, while Goldman Sachs said it could hit 40%.
In its statement the bank's monetary policy committee made clear that Thursday's move was the start of a gradual process, with the target of bringing inflation down to 5%.
President Erdogan's problem is that Turkey's inflation rate remains stubbornly high and its central bank's reserves have fallen to drastically low levels, after it spent billions of dollars previously trying to prop up the declining lira.
Interest rates have come down from 19% two years ago to 8.5% in recent months and the change in direction will have repercussions for a country already in an economic crisis.
Turkey's economy had grown dramatically in the early years of President Erdogan's leadership. But in recent years, he has ditched the traditional economic approach by blaming high inflation on high borrowing costs and is now seeking to stimulate economic growth as a result.
In the past five years, the Turkish currency has lost more than 80% of its value and foreign investment has plummeted. Turks are now trying to move foreign cash out of local banks.
In our Market Monday 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.
Eurozone in recession as rising prices hit spending
The eurozone fell into recession this winter, revised figures show, as consumers were hit by rising prices.
The economy of the 20 nation-bloc contracted by 0.1% between January and March, after also shrinking in the final three months of 2022. As in other regions, the eurozone has been hit by rising food and energy prices that have weighed on households.
Spending by households in the bloc fell by 0.3% in the first three months of 2023, and by 1% in the previous quarter. Initial growth estimates had suggested that the eurozone had avoided a recession and expanded by 0.1% in the first three months of the year. But the latest updated figures from Eurostat showed it had shrunk in the first quarter.
Revised data from Germany - Europe's largest economy - contributed to the move into recession. Last month, Germany said it had fallen into recession at the start of the year after its economy contracted by 0.3% between January and March.
The bad news comes after a tough year for European economies, as surging energy prices sparked by Russia's war on Ukraine have driven up the cost of living.
The European Central Bank has responded by raising interest rates by 3.75 percentage points, in a bid to cool soaring prices.
Ireland's economy shrank by 4.6% in the first three months of 2023 compared with the previous three months. Compared with the same period last year, its economy contracted by 0.3%.
Lithuania's economy was hit hardest compared with last year - its economy shrunk by 3.7%.
Japan’s GDP revised at higher level, with a growth of 2.7% in the first quarter
Japan’s economy grew an annualised 2.7% in the first quarter of the year, expanding further than earlier estimates of 1.6% made last month, with the latest government data.
Economists surveyed by Reuters had expected to see growth of 1.9%. The Japanese yen strengthened by 0.14% to 139.98 against the U.S. dollar shortly after the release, while the Nikkei 225 rose 0.17% and the Topix was up 0.2%. Quarter-on-quarter, the economy expanded by 0.7%, beating estimates by Reuters of 0.5%.
Private non-residential investment, or capital spending, rose 1.4% — higher than initial government estimates of 0.9%. Private demand rose by 1.2% and domestic demand rose by 1%, while exports of goods and services dropped 4.2%. Imports also fell 2.3%, the recently revised government data showed.
The upside surprise for Japan’s economic growth comes as stocks remain in focus after recently notching new three-decade highs thanks to a weak yen and plans for structural reforms.
Factory activity in the economy expanded for the first time since October 2022, a Purchasing Managers’ Index published last week showed. The reading stood at 50.6, ending a six-month streak of readings below the 50-mark that separates expansion and contraction.
The resilience seen in the Japanese economy as global growth braces for a further slowing, as a result of central banks sharply raising interest rates, could be short-lived, Senior Economist Norihiro Yamaguchi of Oxford Economics said.
In the coming months, many predict the economy will maintain resilience with more room for built-up demand and more businesses are seeing greater opportunity for investment in the fiscal year.
But further headwinds are expected due to a delayed effect on external factors affecting the Japanese economy, he added.
Australia’s economy expands 2.3% in the first quarter, the slowest growth in just under two years
Australia’s first-quarter gross domestic product expanded by 2.3% year-on-year, just slightly below analyst expectations.
Economists polled by Reuters had forecast an expansion of 2.4%, compared to the 2.7% expansion in the fourth quarter of 2022. On a quarter-on-quarter basis, GDP grew by 0.2%, compared to the 0.3% expected in the Reuters poll.
This is the sixth straight rise in quarterly GDP for the country, but the slowest growth since the Covid-19 Delta lockdowns in the September quarter of 2021.
The GDP readings are key to the Reserve Bank of Australia’s decision making process for its monetary policy. Just on Tuesday, the RBA surprised markets and raised its benchmark policy rate by 25 basis points to 4.1%, an 11-year high.
Many governors have looked to reiterate that the central bank will seek to navigate a narrow path in the country’s monetary policy.
In this narrow path that many envision, Australia’s inflation will return to its 2% to 3% target range, the economy will continue to grow, and gains in the labour market are preserved.
Many think that while GDP has slowed and is forecast to slow more, productivity growth will continue to remain low as a result.
The latest observations see that GDP per hour worked fell by 0.3% quarter-on-quarter in the period, resulting in a 4.6% annual fall in productivity — the largest on record.
He also adds that most recent labour market data suggests that productivity will most likely have weakened further this quarter, which will in turn prop up unit labour cost growth and keep services inflation stubbornly high.
Many predict the current peak estimate of 4.35% for the RBA’s benchmark rate, but in light of the GDP readings and government planning, many think that there is a real risk that the RBA could raise rates even higher as a result.
German economy in recession after high prices take toll, revised figures reveal
The latest figures show Germany has entered a recession, after high prices took a bigger toll on the country’s economy than originally anticipated.
Data from the Federal Statistical Office showed Europe’s largest economy contracted by 0.3% in the first quarter of 2023, compared with the previous three months, when it shrank by 0.5%. The technical definition of a recession is two consecutive quarters of contraction.
A previous estimate suggested Germany had narrowly avoided recession with 0% growth in the first quarter.
The national statistics office stated on Thursday that while private sector investment and construction grew at the start of the year, this was offset in part by a drop-off in consumer spending as higher prices forced households to rein in spending.
Overall, combined household spending dropped 1.2% in the first quarter, with shoppers less willing to spend more on food, clothes, and furniture. Government spending also dipped by 4.9% compared with the previous quarter.
The war in Ukraine has unsettled both businesses and consumers, both holding back on investing and buying respectively, which has severely impacted demand. Interest rate rises by the European Central Bank have so far had very little influence on reducing inflation, which stands at 7% across the eurozone.
Considerably higher heating costs, despite government subsidies, mean German consumers were holding back on spending on other areas of the economy.
The Ifo Index – Germany’s most prominent leading monthly indicator, showed a continuing weak backdrop for businesses. In May it sank again for the first time in half a year. All sectors apart from services were observed to be on the decline.
The state-owned investment and development bank KfW said this week it expected German GDP to shrink by 0.3% overall this year. It added that two-thirds of the most recent downturn may be caused by more work days being lost in 2023 to public holidays than the previous year.
Oil prices rise as Saudi Arabia pledges output cuts
Oil prices have risen after Saudi Arabia said it would make cuts of a million barrels per day (bpd) in July.
Other members of Opec+, a group of oil-producing countries, also agreed to continued cuts in production in an attempt to shore up flagging prices. Opec+ accounts for around 40% of the world's crude oil and its decisions can have a major impact on oil prices.
In Asia trade on Monday, Brent crude oil rose by as much as 2.4% before settling at around $77 a barrel. Opec+ said production targets would drop by a further 1.4 million bpd from 2024.
The seven hour-long meeting on Sunday of the oil-rich nations came against a backdrop of constantly falling energy prices. Oil prices soared when Russia invaded Ukraine last year, but are now back at levels seen before the conflict began in a welcome return for all.
In October last year Opec+, a formulation which refers to the Organization of Petroleum Exporting Countries and its allies, agreed to cut production by two million bpd, equating to 2% of global demand.
In April this year the group agreed to further cuts, which were due to last to the end of this year. Oil producers are grappling with falling prices and high market volatility amid the Russian invasion of Ukraine.
The West has accused Opec of manipulating prices and undermining the global economy through high energy costs. It has also accused the group of siding with Russia despite sanctions over the invasion of Ukraine.
In response, Opec insiders have said the West's monetary policy over the last decade has driven inflation and forced oil-producing nations to act to maintain the value of their main export.
European economy expected to grow faster than forecast, state EU economists
Europe’s economy is expected to grow faster than previously thought this year and next, despite high inflation and rising interest rates, according to the latest figures from the European Commission.
The commission said the EU’s 27 members would grow at an average of 1% in 2023, up from a previous estimate of 0.8%. It nudged its forecast for growth in 2024 to 1.7% from 1.6%. With this information, the eurozone’s 20 members are expected to grow by 1.1% on average and 1.6% next year.
By comparison, the UK economy is expected to be weaker, with growth of 0.25% expected this year and 0.75% in 2024, according to the latest figures published by the Bank of England.
With fears of a recession easing, EU growth so far this year has been much stronger than expected when the last growth estimates were made in February. Ireland will lead the EU growth league over the next two years as it has done for the past two years.
Dublin is forecast to enjoy a growth rate of 5.5% and 5% in 2023 and 2024, respectively, after amassing a growth rate of 13.6% in 2021 and 12% in 2022.
France’s growth rate will accelerate from 0.7% in 2023 to 1.7% in 2024 while Germany’s economy, which was hit hardest by sanctions on Russian gas, is expected to expand by 0.2% this year and 1.4% next year.
Estonia and Sweden are the only EU countries to suffer a contraction this year – Sweden by 0.5% and Estonia by 0.4%, before both make modest recoveries in 2024.
For the first time, European Commission officials have examined the prospects for Ukraine’s economy in its quarterly forecast – a move made in response to Brussels accepting the war-torn country as a candidate for EU membership last year.
In this time period, Ukraine had demonstrated a remarkable resilience during the war and much of its economy was able to continue operating.
Ukraine’s GDP is estimated to have slumped by 29% in 2022. This year growth is expected to be just 0.6%, rising to 4% in 2024, the commission said, although the ongoing path of the war will be crucial to the outcome for expected economic growth.
China’s economic data misses expectations as economy continues to show an uneven path to recovery
China’s economic data for April missed expectations as the economy continued to show an uneven path of recovery from the impact of its stringent Covid restrictions.
Industrial production for April rose by 5.6% year-on-year, compared to the 10.9% expected by economists surveyed in a Reuters poll. The figure was up 3.9% in March following a muted start to the year.
Retail sales rose by 18.4% – lower than economists’ forecast of a surge of 21%. Fixed asset investment rose by 4.7%, against expectations of 5.5%. The reading rose 5.1% the previous month.
China stocks have pared most of the gains seen this year. The Shenzhen Component was down 4.67% quarter-to-date and up only 1.48% year-to-date, seeing a 9.5% drop from its peak in early February.
China’s latest data follows a mixed picture in the country’s growth trajectory, with services remaining a bright spot in the economy despite factory data falling into contractionary territory in April.
The Caixin China general manufacturing purchasing managers’ index fell to 49.5 in April, marking the first reading below the 50-mark in three months. The 50-point mark separates growth from contraction.
The National Bureau of Statistics’ manufacturing PMI also fell to 49.2 in April from March’s reading of 51.9.Imports for the month also plunged further by 7.9%, missing estimates – exports rose 8.5%.
The latest data included a 20.4% youth jobless rate, the unemployment rate between ages 16 and 24. The reading in April marked a record high.
Citi economists said youth unemployment remains a consistent problem, despite an overall steady labour market – with the latest data showing that the surveyed jobless rate dipped to 5.2% in April from 5.3% in March.