Growing concerns about a possible US recession and China’s post-Covid recovery have cast a shadow over the outlook for the global economy.
Market moves that mattered
Interest rates rise again
The Bank of England raised rates by a quarter percentage point to 4.5% in May and said inflation risks were still skewed to the upside. High and sticky prices continue to be a cause for concern. While UK inflation fell to 8.7% in April, it was higher than expected, with core inflation rising by 6.8%. The hope is that food price inflation has now started to peak, which would help ease the inflationary pressures alongside a fall in the energy price cap.
The UK housing market fell further in May, with prices now averaging £261,000, according to Nationwide. Rightmove data suggests annual house price growth is still marginally positive. However, with interest rates on new mortgages continuing to climb and some providers withdrawing mortgages, it may not be long before we see further modest falls. Consumer credit data remained stable in March and April, but net mortgage lending turned negative in April, suggesting higher interest rates are now starting to bite. Mortgage approvals have weakened since the summer of 2022.
UK growth slipped backwards in March, leaving GDP for the first quarter provisionally at just 0.1%, painting a picture of a stagnant economy going back for 12 months now. Employment data suggested some slight payroll weakness in April and job vacancy numbers are still trending gently lower. UK unemployment remains around 4%, as people slowly return to the workforce post Covid.
Deal reached to raise US debt ceiling
The month started with ongoing worries about the condition of US regional banks, such as First Republic Bank and PacWest Bancorp. However, US politics took centre stage as another round of negotiations over the debt ceiling ensued. The government borrows money for important expenses like social security and Medicare, and reached its current limit of $31.4 trillion in January. Democrats and Republicans clashed before eventually reaching an agreement to raise the debt ceiling for an additional two years, extending beyond the next Presidential election.
The US Federal Reserve (Fed) raised interest rates by 0.25 percentage points as it seeks to bring price rises under control. Inflation ticked down to 4.9% in April, while core inflation – which excludes volatile food and energy prices – increased 5.5% on the year*. US monetary policy expectations were shaped in May by Fed Chair Jerome Powell, who pushed back against the whisper of higher US interest rates by stating that the Fed could now afford to ‘look at the data’, which suggests a pause is due soon. The Fed also continues to disagree with financial markets, which expect US rate cuts later this year.
While the economic picture remains healthy, the future looks less certain with a possible recession in the US later in the year. Revised figures show the US economy grew by 1.3% in the first quarter. The unemployment rate rose by more than expected to 3.7% in May, reversing the dip in April, while nonfarm payrolls surged more than expected and wages softened.
China’s growth splutters
China’s much anticipated economic recovery following the removal of Covid restrictions has so far been fragile and uneven. While the Chinese economy grew by 4.5% in the first quarter, it appears to be hitting asoft patch. Economic indicators for April showed imports, manufacturing and property investment all falling. Although things picked up slightly again May, there are worries the post-Covid recovery is peaking and we could see slower growth in the second half of the year. Relations between the US and China were also tested as China blocked purchases of microchips from US company Micron.
Persistent inflation helped push Germany’s economy into recession in the first three months of the year. GDP shrank by 0.3% during this period, following a 0.5% decline in the previous quarter. The adverse effects of the energy price shock last year, coupled with subsequent inflation, have exerted pressure on Germany’s economy, leading to a decrease in consumer spending. Meanwhile, the European Central Bank (ECB) seems determined to carry on pushing interest rates higher, despite the possible economic consequences.
AI boosts equity markets
The surge of interest in artificial intelligence (AI) has given markets a significant boost in recent months. Thanks to the AI boom, for a brief time the value of chipmaker Nvidia soared to more than $1 trillion. Global equity markets were flat overall, but with a marked contrast between strong gains for US technology shares, driven in part by positive news from Nvidia and falls for UK and European markets. This was not helped by sticky inflation, a weaker oil price, a stronger US dollar and the prospect of high interest rates persisting.
Bonds yields rise
Higher interest rate expectations were renewed in May, notably in the UK, further driving down the prices of longer-dated bonds and leading to heavy falls for some fixed income investors. A concern remains about the strength of UK wages as regular pay growth accelerated to 6.7% in the three months to March.
Martin Lawrence, Director of Investments at Wesleyan, said: "Higher longer-term interest rates in May (notably gilt yields) have allowed us to continue to purchase longer-dated UK government bonds (increasing duration gently) and corporate bonds at more attractive prices, in anticipation of generating higher longer term returns for patient investors such as ourselves."
UK commercial property opportunities are starting to increase with higher interest rates, and therefore lower property prices. This makes the potential returns more attractive, so we expect to acquire more good-quality assets in the months ahead. We also continue to gently sell UK equities and buy overseas equities, where appropriate, across our fund range. Our property team of qualified chartered surveyors look after commercial property portfolio of around £400 million. They manage a vast array of shops, offices and industrial units across the UK.
Please remember the value of investments and any income can go down as well as up and you may get back less than you invest.
* US Bureau of Labour Statistics