Global markets have been bolstered by growing optimism that central banks around the world have probably finished increasing interest rates.
Stocks rose following the Bank of England’s decision to maintain interest rates at a 15-year high for the third consecutive time, holding steady at 5.25%. There was also good news for households and businesses as inflation continued to trend downwards, slowing to 3.9% in November.
UK pay growth slowed and job vacancies decreased again as the labour market continued to cool amid a weak economy and elevated interest rates. Pay growth dipped from 7.8% to 7.3% in the three months leading up to October, while job vacancies saw a decline of 45,000.
Persistent high interest rates and inflation continued to weigh on consumers and businesses, resulting in flatlining growth in the three months up to October. The UK economy contracted by 0.3% in October, with the services, manufacturing and construction sectors all shrinking*.
UK house prices increased for a second consecutive month in November by 0.5%, according to Halifax. However, prices remain lower than a year ago and are likely to face continued pressure throughout the year ahead. There are also indications that mortgage rates are starting to ease slightly after the highs seen during the summer.
Fed holds rates
US stocks surged after the Federal Reserve (Fed) announced it would leave interest rates unchanged for the third consecutive meeting. The Fed opted to keep its benchmark interest rate within the range of 5.25% to 5.50%, marking the highest level in 22 years. The US central bank also suggested it could cut rates three times in 2024 if inflation continues to decline.
In a sign the cost of living crisis is finally easing, US inflation fell to 3.1% in November. However, core inflation, which excludes food and energy, remains persistently high at 4%. Despite these inflationary pressures and elevated borrowing costs, the US economy continues to be resilient, posting a 5.2% increase in GDP during the third quarter.
US employers added 199,000 jobs in November, a jump from October, while unemployment also fell slightly to 3.7%. The figures will bolster hopes of a so-called soft landing for the economy, where recession is avoided. The robust labour market has played a crucial role in driving consumer spending, although some retailers have reported a recent weakening in their sales.
The US Fed has raised interest rates to their highest level in more than two decades in an effort to slow prices, with most analysts believing they have peaked. After an aggressive rate hiking cycle lasting nearly two years, the Fed is expected to start cutting rates in 2024. With a resilient economy and inflation moderating, it is expected the Fed could cut interest rates several times.
Concerns about eurozone economy
Inflation across the eurozone fell to 2.4% amid concerns about the strength of economies following the most substantial interest rates rises since the inception of the euro. The region’s headline inflation has cooled significantly from its peak of 10.6% in October 2022.
The eurozone economy flatlined in the third quarter, with GDP falling 0.1% compared with the second quarter, where it had seen a marginal 0.1% uptick. With economic output contracting, there are growing fears that the region’s economy may be on the brink of a recession. The European Central Bank (ECB) opted to keep interest rates unchanged at 4% for the second consecutive time.
Industrial production in Germany and Italy dipped in the final quarter of the year, with France and Spain reporting similar outcomes, stoking fears of a recession. Germany’s output fell 0.4% in October from the previous month to the lowest level since August 2020. In Italy, industrial production declined 0.2% from September.
China’s disinflation woes continue
While the rest of the world is grappling with bringing inflation down, China has the opposite problem. The country’s deflationary spiral continues to deepen, with consumer prices plunging 0.5% year on year in November – the steepest price drop in three years. This compounds China’s mounting economic challenges, including a real estate meltdown, anaemic trade activity, and a stunted recovery from three years of Covid lockdowns.
Consumer appetite struggled to rebound in 2023 and China’s 5% growth target is the lowest in decades. Manufacturing activity also contracted for the second month in a row, indicating weakening momentum in the economy despite the government’s efforts to boost growth.
There was some good news, with exports rising by 0.5% in US dollar terms year on year in November, breaking a six-month run of consecutive declines. Meanwhile, imports fell 0.6%. The country has signalled plans to ramp up stimulus spending, but there are fears the slowdown in China will weigh on the global economy in the years ahead.
* Office for National Statistics