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In our Market Monday Insights, Prosperity Investment Management examines the latest developments across the globe's biggest financial markets - providing you with all the latest information you need to know.
China looks to tackle economic challenges as growth slows in second quarter
China's economy faltered in the second quarter, according to official data, coinciding with a key meeting of the country's top leaders to address its sluggish growth.
The economy grew by 4.7% in the three months to June, missing expectations after a stronger start in the first quarter of 2024. The government's annual growth target is approximately 5%.
The world's second-largest economy is grappling with a prolonged property crisis, steep local government debt, weak consumption, and high unemployment.
Observers are uncertain about the potential for bold ideas or debate under President Xi's centralised leadership, with some viewing the meeting as a mere formality to approve pre-made decisions. Economists are also sceptical that the meeting will yield a quick fix, though analysts are watching for announcements that might signal the Party's economic priorities.
Separate data on Monday revealed that new home prices in June fell at the fastest rate in nine years, further highlighting the property sector crisis that has led to the downfall of giants like Evergrande. There is concern that this crisis could spill over into other parts of the economy.
Another issue is deflation, a symptom of weak demand. Producer prices continued to decline last month, while consumer prices rose by only 0.2%, the slowest pace in three months. Retail sales in June grew by just 2%, falling short of expectations and indicating that consumers remain cautious about spending and uncertain about the future.
Beijing is betting on high-tech industries such as renewable energy, artificial intelligence, and chip-making, along with exports, to revive the economy. Last month, China reported a record trade surplus of $99 billion (£76.4 billion) as exports soared while imports struggled.
However, this strategy faces significant challenges. Major trading partners, including the European Union and the United States, have imposed tariffs and other barriers on Chinese goods, ranging from electric vehicles to advanced chips.
UK economy showcases unexpected growth in May
The UK economy grew faster than anticipated in May, driven by a robust performance from retailers and the construction sector. The economy expanded by 0.4%, rebounding from stagnation in April when wet weather deterred shoppers and delayed building projects.
In May, construction experienced its fastest growth rate in nearly a year, with house building and infrastructure projects boosting the industry, according to the Office for National Statistics (ONS).
Analysts indicated that the new figures, coupled with recent comments from Bank of England policymakers, suggest that the decision on whether to cut interest rates next month is finely balanced.
May's growth figure was double the expected rate. Liz McKeown of the ONS noted that many retailers and wholesalers "had a good month, with both bouncing back from a weak April."
The services sector, which dominates the UK economy and includes businesses such as shops, bars, and restaurants, grew by 0.3% in May, while the construction sector surged by 1.9%.
Economists caution against placing too much emphasis on one month's economic activity as it can be influenced by factors like the weather.
In the three months to May 2024, the economy grew by 0.9% compared to the previous three months, marking the fastest pace in over two years, according to the ONS.
Analysts suggest that the surprisingly strong growth figures might reduce the likelihood of the Bank of England cutting interest rates from the 16-year high of 5.25% at its meeting on 1 August.
The Bank raised interest rates to curb inflation, the rate at which prices increase. However, the latest inflation figures showed the rate had fallen back to the Bank's target of 2%.
Despite this, two members of the Bank's Monetary Policy Committee (MPC), which determines interest rates, expressed concerns this week about persistent inflationary pressures.
Strong economic growth can drive up demand for goods and labour, potentially increasing prices and wages. The latest figures for inflation and wage increases are expected to be published next week.
Argentinian economy looks to plateau after slow recovery period
Argentina's beleaguered economy is expected to stabilise and start a fluctuating recovery in the latter half of the year, according to forecasts by analysts and economists.
Economic activity in Argentina has significantly declined since the end of last year, a result of the crisis inherited by libertarian President Javier Milei. Since taking office in December, Milei has implemented a stringent austerity program alongside economic deregulation.
While Milei's policies have balanced public accounts and appear to be gradually reducing an inflation rate of around 280%—one of the highest in the world—consumption has plummeted, and economic contraction has driven half the population into poverty.
Reports show that the economy contracted by 6.7% in the first four months of the year, with observations indicating declines in real wages and employment levels, which will take time to recover to previous levels. Analysts note that the sectors crucial for economic revitalisation have been among the hardest hit.
The construction sector, in particular, has suffered due to reduced public spending and the government halting incomplete projects.
Construya, an association of 12 major construction firms, reported that its index of private sector sales volumes, while recovering 10% month-on-month in June in seasonally adjusted terms, had plunged 32% compared to the previous year.
Analysts now predict that economic activity will begin to slowly edge up from the second half of 2024.
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