17 January 2023
Growth for UK economy
Stocks surged around the globe last week due to positive economic data that brought good news to the UK, US and China.
The UK economy grew by 0.1% in November, as shown in data from the Office for National Statistics (ONS). This came as a surprise, with general expectations that it would shrink by 0.2% in the month. The ONS noted that in November, ‘a month where the FIFA World Cup started’, food and beverage service activities grew 2.2%, meaning football fans played a part in this growth.
Fortunately for now, this news means the UK has a high likelihood of avoiding a recession, but it doesn’t mean the UK is out of the economic woods just yet, as commentators have pointed out. Inflation is still high, economic activity remains weak and the Bank of England will likely continue to raise interest rates for at least the next few months. Put simply, the UK could still enter a recession in 2023.
GDP data was shared on Friday, having little impact on the stock market due to the lateness of its release. However, it didn’t seem to affect the strong start for UK equities in 2023, which continued last week with the FTSE 100 ending the week up 1.9%. This means that over the last three months, it’s risen almost 15%.
Falling inflation in US
Last week in the US, inflation data showed another drop, which helped some significant increases for stock. The S&P 500 grew 2.7%, while the tech-heavy NASDAQ spiked by 4.8%. Despite a difficult 2022, some of the larger members of the NASDAQ, like Amazon and Microsoft, have managed to rebound this year.
Investor hopes are high that the Federal Reserve may start cutting rates with inflation falling. On Monday last week, Raphael Bostic, President of the Federal Reserve Bank of Atlanta, said it was ‘fair to say that the Fed is willing to overshoot,’ suggesting a readiness to drive interest rates further. If talks with business leaders were in harmony with slowing inflation, Bostic also said he could be comfortable with a 0.25% rise at the next Reserve meeting.
What’s to come for UK inflation?
The topics of inflation and interest rates have dominated discussions of the markets thus far. As the UK is set to report its December inflation data, which is anticipated to show another small decline to an undeniably high 10.5%, this conversation will probably continue into the upcoming week.
But looking into the future further, Chief Global Market Strategist at Invesco, Kristina Hooper, says:
“Looking ahead, I suspect markets will become increasingly less focused on inflation as it continues to show signs of moderating and being well under control. In turn, that would mean greater certainty around central bank behaviour.”
“I think markets’ attention will shift to economic growth. In particular, determining how much damage has been done by tightening in Western developed countries and when economies will begin to rebound.”
China’s post-COVID reopening
Another economic topic that appears to be continuing to grow in importance is China’s reopening following its COVID-19 lockdowns.
For example, Julian Evans-Pritchard, Senior China Economist at Capital Economics, comments:
“We had expected disruption from China’s reopening wave of COVID infections to weigh heavily on activity well into Q1. But there is mounting evidence that much of China’s population has already been infected and that disruption is already fading rapidly. Coupled with a wider shift toward more pro-growth policies, this points to a reopening rebound starting this quarter and a stronger 2023 as a whole. We now expect China to grow by 5.5% this year.”