Our latest monthly Investment & Economic Update for August 2023 examines how the global investment markets, economy, and commodities perform.
The investment & economic update for August shows it was a mixed picture across the globe in July, with many major economies beginning to see their efforts to tackle inflation pay off.
UK
The UK economy contracted by 0.1% in May 2023, according to the Office for National Statistics, partly because output was hit by the bank holiday for the King’s Coronation. This followed a surprise increase of 0.2% in the previous month, and reinforced the view among many economists that the country is only likely to see slow growth at best this year.
Why is the Bank of England increasing interest rates
Interest Rates
The Bank of England has said that interest rates will not fall until there is “solid evidence” that rapid price rises are slowing and that once both prices and pay are stable, then rates would drop.
Bank of England Governor Andrew Bailey comments came after the Bank raised interest rates to a 15-year high of 5.25% from 5% on Thursday.
This was the 14th increase of rates in a row.
The move will mean higher mortgage and loan payments for some, but should also mean higher savings rates.
The Bank said for the first time that interest rates would stay higher for longer in an effort to battle soaring price rises and will want to see more evidence that inflation was falling before cutting rates.
“We will not be cutting rates until we are confident that inflation is on a downward path,” he said.
Inflation:
The Investment & Economic update for August showed there was some better news regarding inflation, however, as it fell from 8.7% in May to 7.9% in June.
This was a welcome development for the government, which has made halving inflation this year one of its top priorities.
Nevertheless, it remains well above the Bank of England’s official target of 2% and the inflation rate in many other developed nations.
July was a big month for the UK car industry, with French manufacturer Renault and Chinese carmaker Geely confirming plans to set up a new headquarters in the UK and concentrate on developing hybrid, diesel, and low-emission petrol engines.
Meanwhile, a new electric car battery factory is to be created by Jaguar Land Rover-owner Tata in Bridgwater, Somerset.
This will be one of the largest gigafactories in Europe and will be supported by hundreds of millions of pounds worth of government subsidies.
Ukraine
As the war in Ukraine continued, there was a surprise development when Russian President Vladimir Putin said he does not reject the idea of peace talks.
Mr Putin stated that an initiative put forward by African leaders could “become the foundation of certain processes towards a peaceful resolution, just like China’s initiative.” However, he insisted that a ceasefire would not happen for as long as Ukraine remains on a strategic offensive.
The comments came amid pressure on the Russian President to revive a deal that allows Ukraine to export grain.
Egyptian President Vladimir Putin insisted it is vital that the deal be renewed so the poorest African countries can receive the grain they need.
Europe
The Investment & Economic update for August saw parts of Europe face a significant heatwave, which led to wildfires breaking out in parts of Italy and Greece.
The Greek Island of Rhodes was among the worst-hit locations, with holidaymakers being evacuated and a state of emergency being declared.
The implications of this summer’s extreme weather on the future of the tourism industry in and around the Mediterranean remains to be seen, but there are concerns that it could deter some potential visitors in the next few years.
Last month also saw the European Central Bank (ECB) increase the eurozone’s key interest rate to 3.75% – its highest level in more than two decades.
US
Like Europe, the US was also hit by extreme summer heatwaves in July, with millions of people under “dangerously hot conditions” alerts and temperatures exceeding 38 degrees in some areas.
It will be interesting to see what impact this has on the US’s economic performance when official figures for July are published.
As far as the latest data goes, figures showed that the US economy expanded by 2.4% in the three months to June year-on-year. This was up from 2% in the previous quarter and much higher than many analysts had expected.
The increase in output was driven by many factors, including increased business investment and an upturn in consumer spending.
There was further good news as inflation fell to its lowest level in more than two years in June, with the rate of price growth dropping from 4% in the year to May to 3% in the year to June.
This suggests that the US Federal Reserve’s strategy of increasing interest rates to curb inflation is paying off. Interest rates were increased to a range of 5.25% to 5.5% in July – their highest level in 22 years and the 11th increase since early 2022.
Read the US Treasury statement here
Far East
China’s economy saw strong year-on-year growth of 7.3% in Q2, although it admittedly started from a low base as Covid restrictions had only recently been lifted this time last year.
However, a poll of economists by Reuters suggests that momentum is slowing, and more stimulus measures could be needed soon.
Official figures show that the economy grew by just 0.8% in the three months to the end of June, which may be partly down to a slump in exports to other nations.
Meanwhile, in Japan, the country’s central bank has kept its benchmark interest rate at minus 0.1%. The Bank of Japan acknowledged that the economic outlook is uncertain, and that greater flexibility will be needed over the coming months.
Estimates from the Japan Center for Economic Research suggest that Japan’s economy shrank by 0.2% in May, partly due to declining exports. The organisation now expects to see year-on-year growth of 5.6% between April and June.
Russia:
Sanction-hit Russia is, of course, continuing with its offensive against Ukraine, and the financial impact of this is becoming clear.
In June, the Russian currency fell to its lowest level since the beginning of the war.
Anatoly Aksakov, chairman of the Duma Financial Markets Committee, subsequently admitted that the temporary collapse of the Ruble was caused, at least in part, by the need to fund the occupation of areas that have been illegally annexed by the Russian government.
The ongoing war is also weighing heavily on the minds of many members of the public in Russia. A new poll by the Levada Center found that 58% of Russians believe that “hard times are yet to come” – a reflection perhaps of the impact that sanctions are having on people’s day-to-day lives.
