Week ending 5th August 2022.

In the UK, BoE policymakers yesterday (Thursday 4 August 2022) voted 8-1 to increase interest rates up by 0.5% to 1.75%.

Whilst this increase was expected, what was a surprise was their revised growth and inflation forecasts.

Although their new inflation forecast is for price rises to peak later this year at 13.3%, surprisingly they believe that inflation will remain elevated (and above current levels) all the way through next year and won’t return to their 2% target until 2025!

The BoE’s revised growth forecasts were equally gloomy, as they now think the economy will shrink by 2% as the UK economy is not only expected to enter recession this year, but it won’t return to growth until 2024.

Rather than mince our words, these forecasts are completely pointless and should be taken with a pinch of salt, simply because we are about to have a new Prime Minister and a significant change in government policy – especially if it is the bookies’ current favourite, Liz Truss.

A long recession is therefore far from assured given Liz Truss’ promised significant fiscal stimulus.

And as for inflation, while gas prices have continued to rise (and will undoubtedly mean we will all see another very large increase in our energy bills in October), there are plenty of signs that inflation is cooling.

In addition, to the declines we have seen in petrol forecourt prices as the price of a barrel of oil has fallen over 20% since its June peak, a number of other commodities such as copper and aluminium are today well below recent highs.

Furthermore, shipping costs have fallen sharply.  For example, the Baltic Dry Index (which covers prices for transported cargo such as coal, grain and iron ore) has halved over the past 12 months, while the cost to ship a 40ft shipping container from China to the US, even though still elevated, it has fallen 50% since its peak earlier this year – a clear sign that the global supply chain disruptions caused by the coronavirus lockdowns are starting to ease.

Moreover, it is often said when America sneezes, the world catches cold.  And there were no signs of any impending downturn in today’s US employment data, given the economy added 528,000 jobs – more than double the number that economists expected.

Looking ahead to this coming week, we have US & Chinese CPI inflation; US, Chinese & Japanese PPI inflation; UK Q2 GDP; UK & Eurozone industrial production; Chinese trade balance; University of Michigan Consumer Sentiment Index.

Investment Management Team