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15 May 2023

Economic Highlights

Welcome to our Economic Highlights, bringing you market updates from across the UK, US, Europe and China, as well as the FTSE weekly winners and losers.

UK

London skyline showing the financial district

The Bank of England (BoE) raised the base rate by 0.25% to a new cycle high of 4.5% last week. The primary reason for continued tightening of monetary policy is that headline inflation remains above 10% and the projected reduction is going to evolve somewhat slower than previously imagined. The Bank sees inflation falling back below its 2% target no sooner than during the first quarter of 2025. There has been a big shift in expectations for the economy over the last few months. Last autumn, the BoE forecast a long recession for the UK, one that would last the whole of 2023. Now it expects no recession at all. However, the economy is hardly on fire either. The latest GDP report showed a 0.3% month-on-month decline in activity during March, with unusually wet weather and strikes contributing to the weakness. Quarter-on-quarter growth in the first quarter was just 0.1%.

US

New York skyline

There were no new alarms in April’s inflation data, with headline CPI rising at an annual rate of 4.9% and core CPI at 5.5%, both 0.1% lower than in March. The downward path should continue. An unexpected bounce in used car prices is forecast to reverse and shelter costs (the biggest component of the core reading) are also expected to fall as housing rent increases flatten out. The question is how long it will take, and we expect the Federal Reserve to remain conservative in its policy decisions, not wanting to see inflation rebound if it cuts rates prematurely. The highly-anticipated Senior Loan Officer Opinion Survey (which monitors the propensity of banks to lend money and also the demand for loans) was a bit of a damp squib in the end, although it did reveal a further marginal tightening of lending standards. More interesting, perhaps, was a reduced demand for credit. This weaker sentiment was reflected in a further tick down in the NFIB Small Business Optimism survey. Small businesses are more exposed to the regional banks which have been suffering in recent months.

China

China

Chinese economic data sent a disappointing signal about the country’s economic recovery. CPI inflation moderated to 0.1% year-on-year, its slowest pace since February 2021. Similarly, the pace of decline in producer prices accelerated to -3.6% y/y. New aggregate financing fell significantly in April to CNY 1.22 trillion from CNY 5.38 trillion. New loan issuance also declined to CNY 0.718 trillion from CNY 3.89 trillion. The weaker-than-anticipated data corroborates the poor signal from April PMI and trade data updates. Ultimately, China’s post-reopening recovery is falling short of consensus expectations, although the overall experience is one of a lopsided recovery. While the consumer-oriented services sector is benefitting from pent-up demand following the end of the zero-Covid policy, structural and external headwinds continue to weigh down on the industrial, manufacturing and property sectors.

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