August 2018 Investment & Economic Update
In our latest monthly investment update for August 2018, we look at how the investment markets, global economy and commodity prices are performing.
The FTSE 100 index of leading UK company shares finished July at 7,748.76 points, up slightly from 7,661.77 points at the end of June, an increase of 86.99 points or 1.14% during the month.
The Office of National Statistics (ONS) released data revealing that the UK economy grew by 0.3% in May, up slightly from the 0.2% growth reported for the first quarter.
The figures are part of a change in the way that the ONS reports UK Gross Domestic Product (GDP), moving from a quarterly figure to a monthly figure along with a rolling three month figure.
Rob Kent-Smith, the head of national account for the ONS, commentated on the data stating “The first of our new rolling estimates of GDP shows a mixed picture of the UK economy with modest growth driven by the services sector, partly offset by falling construction and industrial output.”
The Consumer Prices Index (CPI) held firm at 2.4%, once again defying most economist’s expectation that it would increase amid rising global oil prices.
The lower than expected level of price inflation came mainly as a result of the summer retail sales and slow house price growth. With inflation remaining stagnant, the case for the Monetary Policy Committee (MPC) to raise rates is not as clear cut as economists previously thought.
Data from the latest IHS Markit/CIPS UK manufacturing Purchasing Managers’ Index (PMI) shows the rate of expansion remained fell in July, with the rate decreasing slightly from 54.3 in June to 54 in July. The decrease comes off the back of slower rates of expansion in both output and new orders.
The PMI is well below the highs seen at the start of the year, however the index remains comfortably above its long-run average of 51.8.
Rob Dobson, Director at IHS Markit, which compiles the survey said “UK manufacturing started the third quarter on a softer footing, with rates of expansion in output and new orders losing steam. The upturn in the sector has eased noticeably since the back-end of 2017, meaning that manufacturing has failed to provide any meaningful boost to headline GDP growth through the year-so-far.”
Looking at Europe, The International Monetary Fund (IMF) published a report in July stating that the European Union will suffer long-term damage equivalent to about 1.5% of annual economic output by 2030 if Britain leaves the bloc without a free trade deal next year. This would amount to lost economic output of around $250 billion and cost in excess of a million jobs through the EU.
The report goes on to say that the damage for the UK would be much higher, amounting to almost 4% of GDP. Those countries with close ties to Britain, such as Ireland, Belgium and The Netherlands would also suffer disproportionately as a result of “cross-country heterogeneous”.
Turning to the US, the economy grew at an annualised rate of 4.1% in the second quarter of 2018, the fastest pace in almost four years. The gains were driven by strong consumer spending and a surge in exports as firms rushed to beat new trade tariffs.
President Trump described the growth as “amazing”, claiming it as proof that his policies are working. The US President has set a minimum target of 3% growth in 2018 but this could be threatened by trade tariff tensions.
Chief economist at PNC bank, Gus Faucher, commented “If the US and its partners do implement substantial tariffs and other trade barriers, US economic growth is likely to be much weaker than this baseline forecast.”
In China, the world’s second largest economy reportedly grew by 6.7% in the second quarter of 2018, down slightly from the 6.8% reported for the first quarter, and the slowest level of growth for two years.
The official figures suggest that China is still on track to meet Beijing’s official annual growth target of 6.5%, although the growing trade tensions with the US may dampen growth. Analysts have previously forecast that trade tensions could shave up to 0.5% off Chinese economic growth this year, depending on the intensity of tariffs.
Meanwhile in Japan, the government has forecast that the Japanese economy will grow 2.8% in nominal terms and 1.5% in inflation adjusted terms in the fiscal year starting in April 2019. They put the growth down to exports, domestic private consumption and capital spending expected to offset the hit from a planned sales tax hike.
The figures released from the government are more aggressive than those of market economists who see the economy growing just 0.8% in real terms and 1.8% in nominal terms, reflecting the impact from a planned sales tax increase in October 2019.
Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities, said “The government’s projections seem to underestimate uncertainty over the global economy and domestic labour shortages.”
Looking at global growth, the IMF has released its World Economic Outlook forecast which takes into account the trade tensions caused by President Trump’s imposed and planned tariffs. Although the new tariffs represent just a small portion of global trade for now, the IMF warn that if the measures escalate they could shave 0.5% of global growth by 2020.
The IMF’s economic counsellor Maury Obstfeld said “The risk that current trade tensions escalate further—with adverse effects on confidence, asset prices, and investment—is the greatest near-term threat to global growth.”
Returning to the UK, average house prices rose by 0.5% from in June, and prices have risen by 2% in the past year, the slowest pace in five years, according to data released by Nationwide.
Nationwide economist Robert Gardner said “There are few signs of an imminent change. Surveyors continue to report subdued levels of new buyer enquiries, while the supply of properties on the market remains more of a trickle than a torrent.”
Rival mortgage lender, Halifax, reported similar levels of house price growth with a 0.3% increase for June and annual house price growth at 1.8%.
The benchmark 10 year UK Gilt yield ended July at 1.35%, a small increase from 1.28% at the end of June.
£1 currently buys $1.3111 or €1.1218. The Forex Gold Index is $1,220.95/oz and the Silver Index is $15.47/oz. Brent Crude Oil Spot is currently $73.45/barrel.