8th August 2023
BoE struggles as rates rise amid inflation
The expression “between the devil and the deep blue sea” might not really have nautical roots – it’s out for debate – but there’s no denying that the Bank of England knows what it’s like to experience rough seas.
The Bank of England (BoE) chose to raise interest rates a 14th time, bringing the base rate to 5.25% – its highest level in more than 15 years. This was an attempt at striking a balance between the need to combat inflation that was four times its objective and the risks to the economy posed by 13 consecutive rate increases. Governor Andrew Bailey emphasised that unless there is “solid evidence” that rising prices are slowing down, interest rates will not fall.
The BoE have forecast that by next August, inflation may have fallen to 3% and that a recession would be avoided. However, it scaled down its estimates of GDP growth to an average of 0.25% over the subsequent two years and anticipates that higher rates will result in an additional 350,000 people losing their jobs.
Eurozone optimism despite industrial production decline
Markets surged at the start of the week when it was revealed that eurozone inflation fell further in July. Consumer prices increased by 5.3% as opposed to 5.5% in June. The announcement boosted optimism that the ECB can afford to forego raising interest rates at its next meeting in September, despite still being a long way from its 2% target.
The second quarter of 2023 saw growth in the eurozone economy as well. In contrast to the previous quarter’s 0% growth, GDP expanded by a better-than-anticipated 0.3%. Leading the pack, France and Spain saw steady growth thanks to increased exports and tourism, while Germany saw no growth and Italy suffered a contraction. Despite this fortitude, concerns about a recession are only growing as a result of a sharp decline in real incomes and surging interest rates.
The news of a continuing decline in industry activity throughout the world highlighted the dilemma that policymakers are facing. Inflation and growth numbers were optimistic, but industrial production in the eurozone shrank in July at its fastest pace since the start of COVID-19, with a notable dip in Germany as new orders fell dramatically. Because of increased lending rates and fewer new orders, UK industry production declined at its fastest pace in seven months. Positively, manufacturers’ costs for materials and energy decreased for the third consecutive month.
China’s economic slowdown ripples across Asia
The slowdown in China’s economy, which caused industrial activity to decline for a fourth consecutive month, was also felt in July in Japan, South Korea, Taiwan and Vietnam.
Investors were unhappy that Chinese officials made no announcements of tangible actions to stimulate the domestic economy and consumer spending. There are rising concerns that the government’s economic growth target of 5% may not be met for the second year in a row.
Meanwhile, the Nikkei 225 market in Japan suffered its worst day of the year, falling 2.3%, although the impact was less noticeable in Europe.
US manufacturing stabilises after Fitch’s unexpected downgrade
US manufacturing appeared to steady in July, albeit at lower levels, which offered a little more hope. New orders continued to gradually rise, but factory employment fell to a three-year low, indicating that layoffs were intensifying.
Ratings agency Fitch unexpectedly downgraded the US government’s credit rating on Wednesday, citing worries about the status of the nation’s finances and its debt load. This caused a tremor in the global stock market. The S&P 500 in the US saw its largest daily decline since late April.
Economists and experts expressed confusion over the move and questioned Fitch’s timing and reasoning. The judgement was labelled “bizarre and baseless” by President Biden’s administration, which also noted that US governance had improved under Biden’s presidency according to Fitch’s metrics.
However, the statement brought up memories of the political struggle in June to raise the government’s debt ceiling. To avoid a government shutdown, lawmakers must try to agree on the budget for the following year by the end of September when Congress reconvenes after its summer break.
Tech giants diverge while US labour market holds
Last week, almost 30% of S&P 500 companies – including the tech megacaps Apple and Amazon – reported results. Despite exceeding sales and profit projections, Apple’s shares dropped by close to 5% due to weaker-than-anticipated iPhone sales. Amazon’s stock price increased by 8% and its market worth reached more than $120 billion as a result of exceeding Wall Street projections for both sales growth and profit.
The eagerly anticipated update on the US labour market marked the end of the week. The creation of 187,000 jobs last month revealed a labour market that is slowing but nonetheless healthy, although falling slightly short of forecasts. While wage gains were slightly higher than the Federal Reserve would want in its fight against inflation, unemployment remained close to historic lows.
The data bolstered economists’ confidence that the Fed’s envisaged “soft landing” for the economy is now feasible. The US economy now seems to be heading in the correct direction.