Growth, Inflation & Interest Rates

The UK economy has continued to improve in the second quarter, building on the first, which has since proved to be the best quarter since 2021. Although official GDP figures for the second quarter will not be released for a while, the Bank of England (BOE) has estimated there will be growth of 0.5%. Overall, this means that the economy will still be growing at a relatively weak rate. This, combined with inflation continuing to moderate has led markets to expect the BOE to start cutting interest rates in August. Whether this happens or not will depend on inflation figures continuing to fall from the latest CPI figure of 2% (End May).

In contrast, the European Central Bank did not wait for European inflation to get to target, before cutting their interest rate in June to 3.75% (from 4%), even though inflation across the EU had risen to 2.6%!

At the time of writing, Labour have just won a large majority in the General Election, on a platform of getting the UK economy growing. Time will tell how their plans work out, but at least the domestic UK stock market reacted well to their win.

Obviously, the next big Election comes in the USA this November. Nobody knows what the result will be, but markets have so far appeared to be calm in the run up to it, seemingly not too concerned about who wins.

Currently, Markets are more concerned about when the Federal Reserve (Fed) will cut interest rates in the US. Although inflation has continued to moderate in the US, economic growth has remained relatively strong there. This has complicated their decisions and made it very unclear when the Fed may start to cut rates.

Global Picture

The general outlook is one of reducing inflation and slowly rebounding growth, across the globe. This benign backdrop is normally seen as a good one for investment markets. Obviously, there are still many uncertainties, particularly over the Ukraine war and its potential to impact commodity prices (as has happened previously). There is also the potential for impacts to oil prices from the unrest in the Middle East.

However, barring unforeseen shocks, the Global economy does appear to be continuing on a path of gradual recovery and moderating inflation.

Sources: Office of National Statistics, Reuters, BBC.

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