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In our Market 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.
Chinese industrial profits fall by 10% as deflation fears linger
China's industrial profits fell by 10% in October compared to the previous year, highlighting the limited impact of Beijing's stimulus measures on reversing the decline in corporate earnings.
This marks the third consecutive month of profit declines, following a steep 27.1% year-on-year drop in September—the sharpest fall since March 2020. Industrial profits, a crucial indicator of the financial health of China's factories, mines, and utilities, have continued to struggle.
For the first ten months of 2023, industrial profits declined by 4.3% year-on-year, worsening from the 3.5% drop recorded through September, according to the National Bureau of Statistics on Wednesday. The bureau attributed October's smaller decline to the initial effects of Beijing's stimulus measures and anticipated that further fiscal support next year could significantly boost corporate earnings.
State-owned enterprises saw an 8.2% profit decline between January and October, while private companies experienced a smaller 1.3% drop. Conversely, foreign-invested industrial firms, including those with investments from Hong Kong, Macao, and Taiwan, posted a modest 0.9% profit increase during the same period.
Recent data suggests that while some sectors have benefited from Beijing's stimulus measures, persistent deflationary pressures continue to weigh on the broader economy. In October, the consumer price index rose by just 0.3% year-on-year, the slowest pace since June, while the producer price index fell by 2.9%, marking a deeper deflation compared to September's 2.8% decline.
Industrial production growth also lagged expectations. Within fixed-asset investment, real estate suffered a sharper 10.3% year-to-date decline through October, compared to a 10.1% drop through September.
On a positive note, October retail sales exceeded forecasts with 4.8% year-on-year growth, while the unemployment rate dipped slightly to 5% from September's 5.1%. However, China’s economy, the second largest globally, grew at its slowest rate in the third quarter of 2023 since early in the year, weighed down by tepid domestic consumption and an extended property sector downturn.
UK interest rates are set to remain high due to the impact of the latest budget
UK interest rates are expected to decrease more gradually than anticipated over the next two years due to measures outlined in October's Budget, according to forecasts from the Organisation for Economic Co-operation and Development (OECD).
While the Budget's tax and spending adjustments may provide a short-term boost to the economy, they are also projected to slow the pace at which borrowing costs decline.
The OECD warns that these measures are likely to push UK inflation above levels seen in other major economies, impacting the country’s economic landscape. The organisation has revised its growth forecast for the UK economy, predicting slower growth this year compared to earlier projections, followed by a strong acceleration in 2024 and a slowdown in 2026.
The UK economy is now expected to grow by 0.9% in 2023, down from a previous estimate of 1.1%. Growth is forecast to rebound to 1.7% in 2024, up from an earlier 1.2%, before easing to 1.3% in 2026. Despite these fluctuations, economists note that the upgraded 2025 forecast positions the UK as the fastest-growing European economy within the G7 over the next three years.
Interest rates, currently at 4.75%, are projected to decrease to 3.5% by early 2026, partly influenced by higher-than-expected inflation. The OECD’s predictions, published semi-annually, serve as a guide for businesses and governments, though they are subject to revision.
In November, the Bank of England reduced interest rates to 4.75% for the second time this year. However, mortgage costs have risen as the central bank signalled that future rate cuts might occur less frequently and more slowly than previously expected.
Additionally, concerns persist about the Budget’s impact on businesses, particularly regarding the planned increase in the National Insurance rate for employers, which could strain operating costs.
Eurozone economy inflation climbs to 2.3% in November
Annual eurozone inflation rose to 2.3% in November, surpassing the European Central Bank’s (ECB) 2% target.
This marks an increase from October’s 2% and aligns with economist predictions from a Reuters poll. The uptick follows a rise to 1.7% in September, as the deflationary effects of lower energy prices continue to diminish.
Core inflation, which excludes volatile components like energy, food, alcohol, and tobacco, remained steady at 2.7% for the third consecutive month. This persistence is attributed to the resilience of services inflation, which eased slightly to 3.9% in November from 4% in October.
Markets are anticipating a 25-basis-point interest rate cut from the ECB in December, the fourth reduction this year. However, expectations for a larger 50-basis-point cut have diminished due to a modest improvement in the eurozone’s growth outlook and the recent inflation rebound.
ECB policymakers, including Executive Board Member Isabel Schnabel, have emphasized the need for caution in monetary easing, especially as inflation figures exceeded forecasts in October. The upcoming decision will hinge on fresh macroeconomic projections to be presented ahead of the ECB’s December 12 meeting. The central bank will also consider the potential global economic impact of Donald Trump’s recent U.S. presidential election victory, particularly his stance on universal trade tariffs and their implications for EU exports.
Following the inflation report, the euro showed little movement against the U.S. dollar and the British pound.
