September market update - Reflections on August

Stock markets around the world rebound after fears of a US recession appear to be overstated.

Global markets stumbled at the start of August due to recession fears in the US, but they soon bounced back after positive data eased concerns. The FTSE 100 had its worst trading day in over a year after US jobs data sparked a global stock market sell-off, before recovering later in the month.

The Bank of England faced a setback after inflation rose by 2.2% — the first rise this year and slightly above its 2% target. Earlier in the month, the bank lowered interest rates from 5.25% to 5%, marking the first cut since March 2020. However, Bank of England governor Andrew Bailey said not to expect large reductions over the coming months, amid concerns about lingering risks to the economy.

The UK economy continued to recover from last year's recession, growing by 0.6% in the three months to June, following a 0.7% rise in the first quarter.* Economic growth was led by the services sector, in particular the IT industry, legal services and scientific research. However, there was no growth at all in June, as businesses delayed purchases until after the general election.

The UK jobs market remains resilient, with unemployment falling and wage growth still above inflation, sending the value of the pound higher. Unemployment unexpectedly dropped from 4.4% to 4.2% in the three months to June from the previous three months. Meanwhile, wage growth, excluding bonuses, was 5.4% year-on-year over the three months to June, down from 5.7% in the previous three months.

Retail sales were also lifted by the warm summer weather. UK retail sales increased by 0.5% year on year in July, after recovering from a washout June when colder weather deterred shoppers from spending. Average house prices dropped by more than £5,000 in August, although much of this can be attributed to the slowdown in the school holidays.

US share prices recover

There was a global sell-off when weak US job growth in July raised worries about an economic downturn. The US labour market cooled significantly in July, with employers adding 114,000 jobs, which was far fewer than expected. Meanwhile, the unemployment rate rose to its highest level in nearly three years at 4.3%.

However, global share prices recovered as new data showed that inflation is cooling and retail spending is strong. US inflation fell to 2.9% in July, its lowest since 2021, and retail sales increased by 1% from June to July. Core inflation, which does not include volatile food and energy prices, climbed 3.2%, down from 3.3% the previous month.

Investors and economists are expecting the US Federal Reserve (Fed) to cut rates at its next meeting in September. Fed Chair Jerome Powell made it clear at the end of July that a cut in September is “on the table” as long as the data supports it.

Europe’s economy starts to grow

The euro area economy seems to be improving after narrowly avoiding a recession in late 2023. In the second quarter, the region's GDP grew by 0.3%, slightly more than expected. Spain led the way with 0.8% growth, followed by France at 0.3% and Italy at 0.2%. However, Germany's economy shrank by 0.1%, marking another disappointing quarter.

Inflation in the euro area rose unexpectedly to 2.6% in July, which is still above the European Central Bank's (ECB) 2% target. Core inflation rose higher than expected at 2.9%. The ECB held rates steady in July after a June cut, with the possibility of another reduction in September. Although the latest inflation figures are hotter than expected, there are unlikely to impact the outlook for interest rates significantly.

While unemployment is stable it remains high, potentially threatening the recovery. Unemployment across the region rose to 6.5% in June, up from 6.4% in May. The number of unemployed individuals increased by 41,000 from the previous month, bringing the total to 11.12 million people.

Asian markets rally

Asia's stock markets rallied as US recession fears eased, helping to reverse the steep fall seen earlier in the month. Meanwhile, China's economy continues to be weighed down by a prolonged property slump, weak consumer spending and rising unemployment.

Retail sales increased by 2.7% year-on-year in July, up from 2% in June. Meanwhile, property investment dropped by 10.2% in the first seven months of 2024, following a 10.1% decline in the first half of the year.

The real estate downturn slowed fixed-asset investment growth to 3.6% from January to July, down from 3.9% in the first half of the year. The unemployment rate rose to 5.2%, the first increase since February, as economic momentum slowed and business confidence waned.

Despite surprising markets with major rate cuts in July, China kept its benchmark lending rates unchanged. Imports rose by a stronger-than-expected 7.2% in July from a year ago, while exports missed expectations with 7% growth. Exports have otherwise been a bright spot amid slower economic growth.

* Office for National Statistics