17th October 2023
Last week, investors met with a challenging environment due to geopolitical concerns and conflicting economic reports across the West.
UK economy shows modest recovery in August
The Office for National Statistics in the UK said that monthly GDP increased by 0.2% in August while simultaneously lowering its estimate for July’s result from -0.5% to -0.6%.
Due to a combination of industrial action and unusually wet weather, which kept people indoors and slowed activity, July was especially bad for the UK economy.
A strong services sector played a role in August’s result. The market gained some confidence as the positive figure decreased the likelihood of a recession.
Hetal Mehta, the Head of Economic Research at SJP, responded to the news by saying:
“The GDP data was broadly in line with what we and others were expecting – some bounce back was likely given the perfect storm of wet weather and strikes pulling GDP down in July. It is clear, however, that the economy remains weak.
“Monthly GDP has trundled sideways since the beginning of 2022 and the full effect of the Bank of England’s rate increases is yet to feed through. Credit conditions have been tightening and some softening in the UK labour market is evident – these will most likely keep the UK economy on a weak footing in the months ahead.”
Tough choices in upcoming Autumn Statement
Considering the Autumn Statement is just over a month away, UK Chancellor Jeremy Hunt moderated expectations of tax cuts this week. At the annual meeting of the IMF, he said:
“The fiscal position has worsened since the spring, and I will have to take difficult decisions in the Autumn statement.
“The main reason things are more challenging is because interest rate projections for all economies have gone up. The UK is not immune to those changes. We are likely to see an increase in debt interest payments of £20–30bn and that’s a huge challenge.”
Prior to the Autumn Statement, the Bank of England will meet again at the beginning of November to discuss interest rates. New data on the labour market and inflation will be released before the meeting, which is likely to influence the Bank’s decision.
US inflation holds steady in September
Inflation in the US was 3.7% in the year ending in September, which is the same rate as in August. This was a little more than anticipated, in part due to a greater-than-expected effect of rising electricity prices.
For those hoping interest rates won’t rise any higher, the fact that core inflation – which excludes volatile goods like fuel – dipped down from 4.3% to 4.1% was good news. Instead, with interest rates likely to stay elevated for a while, these inflationary numbers support the idea that rates will not drop for some time.
Middle East unrest impacts global markets
The current unrest in the Middle East poses a challenge to all markets.
Amundi’s Group Chief Investment Officer, Vincent Mortier, stated:
“The impact on markets should be limited as long as the conflict remains local and does not spread. It is marginally positive for the defence and the oil sectors, but slightly negative for some others such as aviation and long-haul travel, given the complications to travel to Israel and flying over the region.
“In the US, it is seen as a catalyst to have the government shutdown risk lifted in order to vote for some additional help to Israel. However, the biggest risk is to oil prices as we think the ongoing relaxation of US sanctions on Iranian oil sales will become harder. At the same time, once the immediate conflict will be under control, Israel could decide that now is the time to attack Iran’s nuclear capabilities – with the possibility of a larger regional conflict erupting – and this could lead to higher oil prices.”