High levels of inflation and economic uncertainty continue to plague the investment markets. Investment portfolios are likely experiencing volatility – read on to find out what has been influencing markets.
Despite the doom and gloom statistics, financial services firm JP Morgan suggests that a global recession could be avoided as inflationary pressures ease.
As an investor, you may worry about what the current circumstances mean for your investments and financial goals. Remember, you should invest with a long-term time frame in mind and focus on performance over years, rather than weeks or months.
If you have any questions about your investment portfolio, please contact us.
UK
There were several pieces of big news in the UK during September.
Liz Truss was appointed prime minister on 6 September after winning the Conservative Party leadership race. Just two days later, Queen Elizabeth II passed away and many businesses chose to close or limit operations as a mark of respect during a period of mourning.
During the leadership race, Truss said she’d hold an emergency budget to tackle soaring energy bills and address other economic challenges. However, she has since resigned after stating she could not deliver the mandate on which she was elected, with Rishi Sunak named her successor.
The now former chancellor Kwasi Kwarteng delivered the “mini-Budget” on 23 September. Among the announcements were aggressive tax cuts which led to market volatility and the value of the pound falling against the euro and US dollar. In the weeks following the mini-Budget, may of the changes were cancelled or scaled back significantly as a result.
The raft of tax breaks announced by the chancellor led to market volatility and the value of the pound falling against the euro and US dollar.
Inflation also remained high – it was 10.1% in the 12 months to September 2022. In response to inflation, the Bank of England (BoE) increased its base interest rate again to a 14-year high of 2.25%.
The BoE also said that the British economy is now in a recession after contracting for two consecutive quarters.
Official wage data highlights the pressure many families are facing. While average pay (including bonuses) rose by 5.5% between May and July 2022, it’s a fall in real terms once you factor in inflation.
The economic situation is also affecting aspiring home buyers. Not only do rising interest rates mean repayments will be higher, but some mortgage providers have withdrawn products from the market due to concerns about potential defaults.
Many businesses are struggling with rising costs too and data suggests there could be further challenges ahead:
- The S&P Global purchasing managers index (PMI) suggests the manufacturing sector suffered its steepest downturn since the first Covid-19 lockdown as domestic and overseas demand fell.
- The PMI reading for the service sector fell to 49.6 in August, signalling that the sector is contracting.
- According to data from the Office for National Statistics, the value of sales by small businesses fell by 10% in July, when compared to the previous month. It’s the largest fall since April 2020, when lockdown restrictions were in place.
With these statistics in mind, it’s not surprising that research from the Confederation of British Industry shows a negative outlook. British manufacturers expect the biggest drop in production since the start of last year in the next three months.
Europe
European economies face many of the same challenges as the UK.
In the eurozone, inflation reached 9.1% in August. It led to the European Central Bank (ECB) lifting interest rates by a record amount to try and curb inflation – the base interest rate increased by 0.75 percentage points.
Forecasts for Germany’s economy highlight some of the obstacles to overcome. The Ifo Institute now expects the German economy to contract by 0.3% in 2023. Fears of energy shortages are also fuelling concerns, with a ZEW Institute economic sentiment tracker finding that investor morale is falling.
US
Again, inflation continues to be an issue in the US. Inflation fell slightly when compared to a month earlier in August to 8.3% but it was still higher than expected. Food inflation was also at its highest level since 1979 after a 13.5% year-on-year increase.
However, payroll data indicates that businesses are still confident as employment increased by 315,000 in August.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.