London’s FTSE 100 defies recession concerns as investors anticipate Bank of England rate cuts.
Despite the UK slipping into a recession, London’s FTSE 100 rose in February, with investors expecting the Bank of England to lower interest rates sooner to boost activity. The UK economy shrank by 0.3% in the last three months of 2023, following a 0.1% drop in the previous quarter. A recession is when the economy shrinks for two quarters in a row.
The UK inflation rate stayed at 4% in January, surprising experts who predicted it would go up. Core inflation, which excludes energy and food prices, also stayed the same at 5.1%. It’s likely to be a positive sign for the Bank of England, which has been raising interest rates in an attempt to bring down inflation towards its 2% target.
The Bank of England kept interest rates the same at 5.25% for the fourth time in a row, but cuts are expected later in the year. Policymakers also hinted at lowering borrowing costs later in the year after predicting inflation will drop below 2% in the coming months.
A tight labour supply continues to keep wages high, adding to inflationary pressures. Wage growth in the UK fell less than expected in December to 6.2%. Meanwhile, unemployment went down to 3.8% in the three months to December, from 3.9% in the previous quarter. Job vacancies fell to 932,000 in the three months to January, the lowest since mid-2021.
There are also signs of a recovery in the housing market as price falls eased, suggesting the slump caused by rising mortgage prices may be over. The price of the average home fell by 1.4% in the 12 months to December 2023, which is an improvement on the annual fall of 2.3% in November, according to the Office for National Statistics.
US stocks reach new highs
US stocks were driven to new highs in February following some particularly strong earnings results, bolstered by solid manufacturing, housing and labour-market data.
While inflation remains on a downward path, the slowdown in price increases during January was less than expected. Official figures indicate that annual inflation dropped from 3.4% to 3.1% in January. Core inflation remained steady at 3.9% year-on-year in January, in line with the previous month’s data.
The US Federal Reserve (Fed) left interest rates unchanged in January, but has suggested it won’t cut them until there are more signs that inflation is easing. With some of the world’s biggest economies sliding into recession, the US economy continues to defy fears of a slowdown, despite an aggressive series of interest hikes by the Fed aimed at bringing down inflation. Much of this resilience has been fuelled by consumers who are still spending even though prices have been rising.
The US jobs market grew again in January, with employers adding 353,000 new jobs over the month. Unemployment also stayed close to a 50-year low at 3.7%.
China’s deflation woes worsen
China witnessed its most significant drop in consumer prices in 15 years in January as deflation worsened. Since the easing of Covid-19 restrictions, falling global demand for Chinese goods coupled with the ongoing property crisis have weighed on consumer spending.
China’s central bank cut its mortgage-linked loan rate by a record amount to stimulate the struggling property sector. As the world’s second-largest economy, China relies heavily on the property market to drive growth and also maintain employment levels.
Since the government cracked down on what it viewed as dangerous levels of borrowing in the property sector, dozens of developers have defaulted on their debts, while many others are struggling.
For the first time in two decades, Mexico has also overtaken China as the leading source of goods imported to the US. The shift reflects the growing tension between Washington and China, as well as US efforts to import from countries that are closer to home.
Meanwhile, official data showed that foreign business investment into China last year increased by the lowest amount for three decades. In some rare good news, tourism spending in China during Lunar New Year jumped above pre-Covid levels.
European inflation slows
Euro area inflation slowed to 2.8% in January, fuelling optimism that the European Central Bank (ECB) might start to cut interest rates. However, core inflation, while moderating from 3.4% in December to 3.3% in January, remained marginally higher than economists had anticipated. Furthermore, the euro area witnessed a slowdown in wage growth for the first time in 15 months, indicating a potential alleviation of pressure on pay levels.
Despite these developments, the ECB emphasised the need for additional evidence that inflation is heading towards its 2% inflation target before contemplating any interest rate adjustments. The region managed to avoid recession by the narrowest of margins in 2023 after the economy stagnated.
There was some good news, with euro area manufacturing rising unexpectedly in December, suggesting a revitalisation of industrial output alongside stable employment growth.