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By Wesleyan

Financial markets pick up after a challenging start to month

financial planning
4 min
Mature man sitting on table with laptop and coffee

It was a mixed month for the UK stock market after inflation fell by less than expected, although performance picked up later in the month. Inflation in the UK dropped to 6.8% in July from 7.9% the previous month thanks to falling energy costs. However, core inflation – which strips out volatile food and energy prices – held steady at 6.9%, keeping pressure on the Bank of England to maintain interest rates to rein in price rises.

Wages hit a record high growth rate in the UK, adding further concerns about long-term inflationary pressures. Excluding bonuses, average pay jumped 7.8% in the three months through to June compared with last year. There was also a surprise rise in the unemployment rate, which rose from 4% to 4.2%, while the number of job vacancies fell to 1.02 million.

UK consumer spending slowed in July as the weather reduced demand for summer clothing, leaving retail sales growth well below the inflation level. Retail sales rose by just 1.5% in July, a marked downturn from the previous July’s 2.3% growth. Average UK house prices fell for a fourth month in a row, dropping by 2.6% in the year up to July, according to Halifax, with a typical UK home costing £285,044 compared with a peak of £293,992 last August. There was good news after the UK economy rebounded with growth of 0.5% in June following a 0.1% fall in May when output dipped due the extra holiday for the King’s coronation.

US inflation edges up

Inflation in the US edged up to 3.2% in July from 3% in June, continuing its upward climb despite aggressive interest rate hikes. However, core inflation, excluding food and energy, dipped to 4.7%, down from 4.8% in the prior month. Persistent inflation has stoked concerns that the largest global economy may need to maintain elevated rates for longer to rein in rising prices. While inflation is well off the high of mid-2022, it is still above the US Federal Reserve’s (Fed) 2% target.

Amid tightening policy and still-high inflation, the economy remains robust. Employers added 187,000 jobs in July, unemployment fell to 3.5% and wages grew, with average hourly earnings up 0.4%. The US had its sovereign credit rating downgraded by Fitch due to prolonged debates over its debt load and declining governance standards, but the move had minimal impact on markets.

The Fed resumed lifting interest rates in July with a quarter percentage point increase, taking them to a 22-year high. This raised the Fed’s benchmark short-term rate from roughly 5.1% to 5.3%. Federal Reserve Chair Jerome Powell has called for more vigilance in the fight against inflation, warning that additional interest rate increases could be yet to come.

Euro area growth picks up

Euro area inflation remains steady, while the economy picked up in the second quarter – although economists still fear there is a possibility of recession. The headline inflation rate stayed at 5.3% in August – higher than expected. Second-quarter growth was modest at 0.3%, but the outlook remains relatively weak.

Amid rising interest rates, economic sluggishness and the end of pandemic support programmes, more companies are declaring bankruptcy. The number of businesses filing for bankruptcy rose by 8.4% in the quarter ending June – the highest level since 2015.

The region’s unemployment rate stayed at a record low in July in a sign that the labour market is in good shape despite falling growth. The unemployment rate for the 20 countries in the euro area was 6.4% in June, with the number of people without jobs just over 10.9 million, up slightly from the previous month.

China's economy is slowing

European and Asian stocks slipped in July as concerns mounted over China’s faltering economy. The world’s second-largest economy is losing momentum with a real estate downturn, weak consumer spending and plunging credit growth.

China fell into deflation after consumer prices dropped for the first time since early 2021, underscoring the challenges policymakers face in reviving consumption. China’s imports and exports also tumbled much faster than expected in July, threatening growth prospects. Exports plunged 14.5% from a year ago, while imports sank 12.4%.

China has cut its benchmark lending rate to try to stimulate the economy and boost demand. Beijing faces pressure to reduce rates and increase demand after a string of disappointing data. China’s property crisis has intensified with two major developers in severe financial trouble. Evergrande has filed for bankruptcy protection in the US, while Country Garden also faces a risk of default in the coming weeks.

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