Central banks continue to tighten monetary policy. Both the ECB and the Bank of England raised interest rates by another 25bps, reaching their highest levels since the financial crisis, while similar tightening was seen in the US, Japan and elsewhere. Despite this ongoing increase in rates, many investment banks and the IMF now expect the global economy to achieve a ‘soft landing’.
Although recent data has been encouraging, and the global economy is proving resilient, risks remain. The full impact of monetary policy is only felt with a lag and many equity markets, notably the NASDAQ, have been on a tear. European equities have performed reasonably well although the UK equity market continues to languish. We continue to believe that the UK market is exceptionally cheap and its discount to peers is unwarranted.
At first glance the UK’s inflation outlook appears problematic, but we continue to believe that the challenges facing developed economies are similar and the UK is not a particular outlier. Globally inflation is trending down, albeit with uncertainty around the speed of the decline. Ongoing signs of easing price pressures led the ECB to reduce its hawkish rhetoric and indicate that it had become more data dependent. The question is whether it has already went too far, with the Germany economy stagnating in Q2 and the Eurozone composite PMI in July dropping further into recessionary territory.
Elsewhere, the Chinese economy continues to falter and rather than providing an inflationary impetus, as was feared earlier in the year, now risks exporting deflation. The Chinese government is likely to introduce further policy stimulus, but economic growth is likely to continue to disappoint. In sharp contrast US economic growth accelerated in Q2 to 2.4% from 2% in Q1.