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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.
UK economy continues to recover with latest 0.6% growth figure
The UK's economy grew by 0.6% from April to June, continuing its recovery from the recession at the end of last year.
This growth aligns with predictions and follows a 0.7% increase in the first quarter of this year.
The services sector, particularly the IT industry, legal services, and scientific research, drove this growth. As the largest contributor to the UK's economy, the services sector far outpaces manufacturing and construction, both of which experienced a decline in output during this period.
Last year, the UK experienced a brief and mild recession, defined as two consecutive quarters of economic contraction. Although gross domestic product (GDP)—a key indicator of overall economic activity—expanded in the second quarter, growth was stagnant in June.
While the services sector boosted the economy over the three-month period, it weighed on June's performance. Growth was affected by junior doctors' strikes, with NHS England reporting 61,989 cancelled appointments due to industrial action between June 27 and July 2.
Economists have cautioned that growth might slow in the second half of 2024. Earlier in August, the Bank of England lowered interest rates to 5%, marking its first rate cut in four years.
Manufacturing activity was mixed in the three months to June. Although the sector declined overall during the quarter, it saw growth in June.
The Office for National Statistics (ONS) also reported that construction output fell by 0.1% from April to June, as new building projects decreased, although repair and maintenance work increased.
This week, new inflation data showed a rise to 2.2% in the year leading up to July, surpassing the Bank of England's 2% inflation target.
Inflation in the services sector, which the Bank monitors when setting interest rates, also increased. Many economists anticipate that the Bank will cut interest rates twice more this year, potentially lowering them to 4.5%.
European stocks close lower as market uncertainty continues
European stocks closed lower on Tuesday afternoon, weighed down by persistent market uncertainty regarding the economic outlook.
The pan-European Stoxx 600 index fell by 0.46%, with nearly all sectors and major exchanges finishing in negative territory, except for the auto sector. Banks dropped 1.25%, while oil and gas stocks declined by 2.09%.
Shares of British telecom giant BT plunged 6.39% after competitor CityFibre announced a partnership to offer Sky broadband services on its network.
In central bank news, Sweden's Riksbank reduced its interest rate by 25 basis points, bringing it down to 3.5% from 3.75%. The central bank also hinted at two to three additional rate cuts later this year.
Globally, attention is shifting toward the U.S. Federal Reserve for guidance on the pace of policy easing, which could have far-reaching effects. These developments may provide investors with more clarity on upcoming interest rate decisions ahead of the Fed’s next meeting.
Fed futures suggest a 76% chance that policymakers will cut rates by 25 basis points in September, according to the CME FedWatch Tool. On Tuesday, U.S. stocks fluctuated in early trading, following the S&P 500 and Nasdaq Composite achieving their longest winning streak of 2024 on Monday.
In Asia-Pacific, markets mostly rose on Tuesday, tracking Wall Street's gains from the previous night, as investors digested minutes from the Reserve Bank of Australia’s latest meeting.
Meanwhile, Eurozone inflation edged up to 2.6% in July 2024, from 2.5% in June, according to fresh data from the European Union’s statistical office. In contrast, Germany’s producer price index fell by 0.8% year-on-year in July, as reported by the Federal Statistical Office.
Japan’s economy bounces back, driving case for more rate hikes
Japan's economy grew at an annualised rate of 3.1% in the second quarter, significantly surpassing expectations and rebounding from a downturn earlier in the year.
This robust growth, driven by a sharp increase in consumption, supports the case for another near-term interest rate hike.
The Bank of Japan (BOJ) had predicted that a strong economic recovery would help inflation sustainably reach its 2% target, justifying further rate increases after last month's hike, part of its effort to unwind years of massive monetary stimulus.
The 3.1% GDP growth exceeded the median market forecast of 2.1% and followed a revised 2.3% contraction in the first quarter, according to government data released on Thursday.
This translates to a quarterly increase of 0.8%, outperforming the 0.5% rise expected by economists in a Reuters poll.
Private consumption, which makes up over half of Japan's economic output, rose by 1.0%, doubling the forecasted 0.5% increase and marking its first gain in five quarters.
Previously, private consumption had been a weak point, as households struggled with rising living costs partly due to higher import prices caused by the weak yen.
Public dissatisfaction over increasing living costs was a factor in Prime Minister Fumio Kishida's decision to announce his resignation next month. Meanwhile, a surge in tourism has bolstered retail sales in Japan.
The government expects tourist spending to reach 8 trillion yen ($54.74 billion) this year, viewing tourism as a crucial growth driver for an economy long burdened by an ageing population.
Capital spending, a key indicator of private demand-led growth, rose by 0.9% in the second quarter, aligning with the median market forecast from the Reuters poll. However, external demand (exports minus imports) slightly dampened growth, reducing it by 0.1 percentage points.
Last month, the BOJ raised interest rates and outlined a plan to reduce its large-scale bond-buying program, signalling a gradual move away from its extensive monetary stimulus. Japan remains a global outlier in raising rates, as most major central banks, including the U.S. Federal Reserve, are either easing policy or moving towards it.
