15th August 2023
Glimmers of hope amid UK economic challenges
For most of 2023, life in the UK has been pretty bleak. Given that the cost-of-living crisis has persisted longer than many would have hoped, inflation has stayed above that of developed market rivals. And these problems have only gotten worse as a result of higher interest rates and poor equity performance.
However, the nation received some welcome news last week. The success of the England Women’s football team sees them move to the next stage of the World Cup with a semi-final match against Australia.
Additionally, it was reported that the British economy expanded by 0.2% in Q2 – welcome news considering the consensus expectations of zero growth. This was also higher than the 0.1% observed in the previous three months, and it was the strongest quarterly reading in over a year.
UK economy defies predictions with resilient growth
The UK economy is still more resilient than many had predicted, even though 0.2% isn’t particularly high by historical standards. As with previous additional public holidays, many economists had anticipated that the May bank holiday would have a greater effect on GDP. Economists were also surprised by a solid 0.5% growth in June, in part affected by the warmer weather.
The expansion also offers the Bank of England a little more leeway to raise interest rates. The Bank decided to increase rates by an additional 0.25% at its most recent meeting. Following the two updates, Azad Zangana, Senior European Economist and Strategist at Schroders, noted:
“The latest GDP figures suggest more monetary tightening is required to slow domestic demand and to, in turn, ease domestic inflation pressures. Indeed, financial markets have responded to the latest figures. Gilts yields across the curve are higher, and the pound has strengthened against both the euro and US dollar.”
Italy’s windfall tax triggers market turmoil
The British economy has so far surpassed the predictions made by the International Monetary Fund at the beginning of the year that it would do the worst of the major markets in 2023. The 0.2% rise was much better than Italy’s 0.3% decline and Germany’s 0.3% flat performance.
These Italian figures applied pressure on Giorgia Meloni, the prime minister of Italy. Initial measures taken by her government included a 40% windfall tax on additional profits made by Italian banks. Italian banks have witnessed an increase in earnings, as has been the case abroad, due to higher lending fees made possible by rising interest rates. A portion of these excess profits, according to the government, would be used to address Italy’s own cost-of-living issue.
The consequences of this move were felt immediately, as the FTSE Italia All-Share Banks Index plummeted 7.6%. European markets were already a little jittery when the damage was done, and several British banks as well as the Euro Stoxx Banks Index also fell as a result of the news.
The Italian government quickly clarified that the levy would be limited to no more than 0.1% of a lender’s total assets in order to prevent a potential market route. Although many banks continue to trade at far lower prices than they were before the announcement, the update did enable the industry to somewhat recover.
US inflation figures rise
Investors in the US had better news as government figures revealed that the inflation rate in July was 3.2%. Despite this figure being somewhat higher than the 3.0% recorded in June, experts had previously expected a rise of some capacity because of soft data from 2022.
Hopes grew that the Federal Reserve wouldn’t need to hike interest rates in response to the news at its upcoming meeting. Even if this was the case, Mark Dowding, Chief Financial Officer at Bluebay, noted:
“The trend in inflation continues to remain significantly above the Federal Reserve (Fed) target and with the labour market remaining tight and the growth backdrop broadly looking robust, it strikes us that we remain far from a point where we should be thinking about lower interest rates, even if the hiking cycle does now look largely done.”