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It’s not certain whether the saying ‘between the devil and the deep blue sea’ really does have nautical origins. But there’s no doubt the Bank of England knows how it feels to be in a tight spot.
Caught between the need to fight inflation running at four times its target and the risks to the economy created by 13 back-to-back interest rate hikes, the BoE opted for a 14th rise, taking the base rate to 5.25% – its highest level in over 15 years. Governor Andrew Bailey stressed that interest rates will not fall until there is “solid evidence” that rapid price rises are slowing.
The Bank forecast that a recession would be averted and inflation could be down to 3% by next August. But it further lowered its GDP growth forecasts to an average of 0.25% over the next two years and expects the number of people out of work to rise by 350,000 as a result of higher rates.
At the beginning of the week, markets jumped on news that eurozone inflation fell further in July. Consumer prices grew by 5.3% compared to 5.5% in June. Although still a far cry from the ECB’s 2% target, the news boosted hopes it can afford to skip raising interest rates at its next meeting in September.
The eurozone economy also returned to growth in the second quarter of 2023. GDP expanded by a better-than-expected 0.3%, compared with zero growth in the previous quarter. France and Spain led the pack, growing at a sustained pace on the back of stronger exports and tourism; but Germany registered no growth and Italy suffered a contraction. Despite this resilience, recession worries continue to mount as a large drop in real incomes and surging interest rates take their toll.
The dilemma facing policymakers was underlined by news of a continued slump in global factory activity. Countering the positive news on inflation and growth came data showing that manufacturing activity in the eurozone shrank in July at its fastest pace since the onset of COVID-19, headlined by a marked downturn in Germany as new orders declined sharply. UK factory output suffered as well, falling at its fastest pace in seven months as higher interest rates and fewer new orders took their toll. On the plus side, costs paid by manufacturers for material and energy declined for the third consecutive month.
Japan, South Korea, Taiwan and Vietnam also saw manufacturing activity contract in July, highlighting the strain created by China’s sluggish economy, which saw factory activity fall for the fourth straight month.
Investors were disappointed that Chinese authorities failed to announce any concrete measures to boost the sputtering economy and domestic consumption. Fears are growing that the government’s economic growth target of around 5% could be at risk for a second year in a row.
There were slightly more encouraging signs from the US, where manufacturing appeared to stabilise in July, albeit at weaker levels. A gradual improvement in new orders continued, but factory employment dropped to a three-year low, suggesting that layoffs were accelerating.
Global stocks suffered a wobble on Wednesday after ratings agency Fitch unexpectedly downgraded the US government’s credit rating, citing concerns over the state of the country’s finances and its debt burden. Japan’s Nikkei 225 index had its worst day of the year, ending down 2.3%, but the reaction was more muted in Europe. In the US, the S&P 500 suffered its biggest daily drop since late April.
The move drew puzzled responses from economists and analysts, who questioned Fitch’s timing and rationale. President Biden’s administration described the decision as “bizarre and baseless”, adding that US governance, by Fitch’s measures, had improved during the Biden presidency.
The announcement did though reignite memories of June’s political battle to lift the government’s debt ceiling. When Congress returns from its summer recess, lawmakers will have to work to reach an agreement on next year’s budget before the end of September to prevent a government shutdown.
Around 30% of companies in the S&P500 reported results last week, including the tech megacaps Apple and Amazon. Apple topped sales and earnings estimates but its shares fell nearly 5% on weaker-than-expected iPhone sales. Amazon also beat Wall Street expectations for sales growth and profit, sending its shares up 8% and taking its stock market value to more than $120 billion.
The week ended with the closely watched update on the US jobs market. Although slightly below expectations, the addition of 187,000 jobs last month showed a labour market that is slowing but still strong. Unemployment remained near historic lows and wage gains were still stronger than the Federal Reserve would like in its battle against inflation.
The data added to economists’ hopes that the ‘soft landing’ for the economy envisaged by the Fed is now possible. For now, the US economy appears to be on the right tack.
Wealth Check
When you’re a business owner, your company’s growth phase is often a time of learning. You figure out what works – and what doesn’t – and then make important decisions to prepare your business for growth.
Matthew Layton, Managing Director of marketing agency Rewind Creative, learned some critical lessons during that early period of growth, including how to better manage clients and the business’s own finances.
“Two critical lessons we learned were about getting payments in on time and enforcing our terms rigorously,” Matthew explains. Early on, Rewind Creative ran into problems with clients delaying payments or not adhering to agreements, which had an impact on cash flow and made it challenging for the business to plan.
To counter this, Matthew implemented more robust processes around agreeing terms with clients. This included requiring formally written documents that would be logged for future reference.
“It allows us to focus on building client relationships rather than constantly chasing late invoices,” he says. “That clarity protects our interests and builds trust with clients. When everyone is on the same page, it sets the stage for a successful partnership and avoids misunderstandings.”
Making conservative assumptions when it comes to projecting income and outgoings has also helped to keep Rewind Creative financially healthy.
“We learned to underpredict on forecasts and overplan on cash flow,” Matthew explains. “While optimism is essential, realistic projections are crucial to avoid overextending ourselves. Being cautious in our estimates ensures we are prepared for unforeseen challenges.”
During its growth stage, Rewind Creative got into a comfortable position with a strong client roster, Matthew says. But there was growing talk about the rising cost of living.
This pushed some clients to reduce their activity with the agency, meaning it had to reposition. By this point, Rewind Creative was able to act quickly, plan properly and stress-test the impacts of its decisions.
Your business success and your personal finances are closely connected and hitting the right balance between them can be tricky. We advise business owners on everything from effective tax strategy to agile cash flow management and pension and employee benefits. Get In touch today to learn more.
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In The Picture
Last week’s interest rate increase left the UK base rate at its highest level since early 2008.
Source: The Bank of England. Data accessed: 07/08/2023
The Last Word
“In reality, prices are little changed over the last six months, with the typical property now costing £285,044, compared to £285,660 in February. The pace of annual decline also slowed to -2.4% in July, versus -2.6% in June.”
Kim Kinnaird, director of Halifax Mortgages says that although house prices have declined slightly in recent months, they continue to display a degree of resilience.
The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.
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SJP Approved 07/08/2023
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