The UK economy has returned to pre-crisis levels, expanding 0.8% in the second quarter of the year which is the 8th successive quarter of GDP growth. Unemployment has fallen to 6.5% while inflation has dropped to 1.5%. However, there are concerns over wages which are rising slower than inflation, indicating negative real wage growth. Furthermore, profit warnings from UK companies have hit a three year high despite the continuing economic recovery. This is due to greater competition and an increasingly strong pound, making UK goods more expensive overseas.
The general picture for the US economy looks relatively promising after disappointing figures in the first quarter. Jobless claims are at their lowest since 2006 and consumer confidence is at its highest for six years. However with talks over interest rate hikes next year there are worries that a tightening of monetary policy will expose risks in the financial sector.
Last month’s data showed that inflation in the Eurozone was steady at 0.5% which is a four and a half year low. At the same time the European Central Bank cut interest rates and introduced a negative deposit rate for the first time ever in an attempt to fight off the potential threat of deflation. However concerns remain over worsening tensions with Russia which could be the external shock that finally pushes the Eurozone into a deflationary trap. Furthermore, bond yields of the core Eurozone states are at an all-time low which reflects the weakness in nominal GDP and a slow economic implosion caused by credit contraction.
The MSCI China index has seen strong growth of over 9% in July. The economy has been buoyed by improved domestic demand and rising exports, which are at their highest for eighteen months, enhancing business expansion. Economic growth has also been aided by the strong performing manufacturing industry, heightened business confidence and a reduction in the rate of job losses in the last month. Production growth seems set to continue as the rate at which inputs are being bought by firms is the highest it has been for a year and a half.
Emerging markets have hit an 18 month high having climbed approximately 4% in July, led by automakers and technology companies, after China posted stronger than expected economic data. However, for Russia, sanctions are likely to cut growth quite significantly causing a deep recession and a return to the soviet stagnation of the 1980s looks likely.
Although ongoing political tensions concerning Russia are likely to restrict growth, we predict that world markets will remain fairly resilient moving in to August given what we have seen this month. The next challenge facing markets is when and by how much interest rates in the UK and US will rise now that unemployment has fallen.
The Eurozone continues to struggle with its recovery and several countries within the union are flirting with the prospect of entering another recession. The major challenge at the moment is tackling deflation, or even very low inflation, which would exacerbate the problems of sluggish growth by raising real debt as well as delaying spending and investment decisions.
Please note, our Investment Commentary is our view of markets and does not constitute investment advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise. If you would like investment advice on your individual circumstances, please do not hesitate to get in touch.