In our latest monthly investment update for August 2017, 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 largely flat at 7,372 points, a modest increase of 59.28 points or 0.8% during the month.
The UK economy grew by 0.3% in the second quarter of 2017, as reported by the Office for National Statistics (ONS). This was only slightly higher than the 0.2% growth in GDP in the first quarter of 2017 owing to weak construction numbers pulling down overall growth, despite improvement in the retail sector growth.
Ongoing uncertainty concerning Brexit negotiations and the domestic political situation continues to influence business and consumer confidence.
Senior UK economist at Berenberg Bank, Kallum Pickering, commented that “While the downside risks from the Brexit vote have not yet played out in a major way, the uncertainty stemming from Brexit is leading to caution in all areas of spending and policy that have long-term implications”.
The Consumer Price Inflation (CPI) inflation rate fell by 0.3% to 2.6%; the first drop in inflation since October 2016, which was largely due to lower petrol and diesel prices. According to the ONS, fuel prices fell for the fourth month in a row in June.
This further reduces the chance of an interest rate rise, helping maintain consumer spending power in the UK. Nevertheless, economists expect inflation to rise later in the year owing to many factors, including the fact that import costs are high, which may cause cost push inflation as some firms pass on increased costs to consumers.
Pound sterling depreciated in value again on the news of a fall in price inflation in June, further increasing the cost of imports to UK business, which is likely to drive growth of UK firms as spending on domestically sourced raw materials and components increases.
The benefits of a weaker pound were revealed in data released on the IHS Markit/CIPS UK manufacturing Purchasing Managers’ Index (PMI) which saw UK Manufacturing PMI increase to 55.1 in July, up from 54.2 in June. The report notes that the main driver behind the increase was “near survey-record growth of new export orders” resulting from the favourable exchange rate available to the UK’s trading partners.
An improvement in world economic growth also boosted UK exports with Rob Dobson, Senior Economist at IHS Markit, commentating that “Although the exchange rate remains a key driver of export growth, manufacturers also benefitted from stronger economic growth in key markets in the euro area, North America and Asia-Pacific regions”.
In the US, the latest economic growth figures indicate an upbeat increase in GDP growth with second quarter growth of 2.8%. This was a boost after a sluggish performance in Q1 2017 of 1.4% which has since been revised down to 1.2%.
The positive Q2 growth was largely fuelled by a resurgence in consumer spending with Stuart Hoffman, PNC senior economic advisor commentating that ‘real consumer spending once again did the heavy lifting’.
However the US ‘economic slowdown’ still seems realistic, with most of the 220,00 new jobs created in June being jobs in low paid industries, where wages struggle to keep up with inflation. The latest GDP growth figures boosts the Fed’s case to continue with rate rises although they will need to factor in the sluggishness of wage inflation into their plans.
The Japanese economy continues to show signs of sustained economic growth. In June, exports increased for the fifth consecutive month, led by exports of electronics and cars. Furthermore, analysts expect the economy to grow by 1.3% this year, up 0.1% compared last month’s prediction and unemployment remains low at 2.8%.
Despite this, Japan’s inflation problem continues as inflation figures remain well below the 2% target.
Haruhiko Kuroda, Governor of the Bank of Japan, has asserted that ‘Japanese companies were still reluctant to pass on higher costs to customers, helping embed ‘lowflationary’ forces in the economy.’
The Bank of Japan has also announced that it expects to meet its 2% target in 2019, one year later than it had originally planned. Consumer confidence in Japan is also falling; the Japan Primary Consumer Sentiment Index for July fell by 2.3% compared to June.
China’s economy beat expectations of 6.5% annual growth for 2017 by growing at an annual rate of 6.9% in the second quarter. Tighter lending criteria have been introduced in China in an attempt to cool the housing market which may lead to a slightly weaker second half of the year once the policies take hold.
Not all analysts are convinced though. Iris Pang, a China economist with ING remarked that “Property prices will have an impact in the second half, but the impact might not be as big as we thought. It is only on prime cities. The third-tier and fourth-tier cities might catch up a little bit and that will offset some of the slowdown in first tier cities”.
Turning to the UK housing market, data released by Nationwide in July showed that prices rose 0.3% in July from June but at a slower pace than the 1.1% jump in June. In annual terms prices were up by 2.9% slowing from a rise of 3.1% in June.
The average UK house price now stands at £211,671. Many economists had expected a slight fall in July’s house price growth as housing transactions in June dipped to their lowest level in eight months.
Andrew Gardener, Nationwide’s Chief Economist, puts this largely down to a supply side issue commenting that “a lack of homes on the market appears to be providing support, with annual house price growth remaining only just outside the 3-6 percent range that has been prevailing for most of the past two years”.
The benchmark 10 year UK Gilt yield stands at 1.23% at the end of July, down from 1.26% at the end of June, a decrease of 2.4% month on month.
£1 currently buys $1.3226 or €1.1197. The Forex Gold Index is $1,266.35/oz and the Silver Index is $16.76/oz. Brent Crude Oil Spot is currently $50.29/barrel.
