Kick Start

Rate cuts are underway. The Bank of England cut Bank Rate to 5% last week, the first since the early days of Covid-19 in March 2020, but highlighted that while rates are in the restrictive territory, future cuts will not be automatic. The US refrained from taking similar action. But markets think they should have, with a weak US labour market leading to a rethink on the balance of risks around inflation and growth. Back in the UK, consumers and firms look well-positioned to support the ongoing economic recovery, as indicated by increasing household bank deposits, corporate borrowing, and consumer credit. Price pressures look to be easing, with lower output price inflation reported in a Bank of England survey. And the foundations of future growth are being laid: digital infrastructure investment in the UK is growing at the most rapid pace in two decades.?

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Check out a glossary of key terms here.

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What’s the latest in the UK?

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BoE cut Bank Rate by 25bps to 5%. It was a finely balanced decision, with a 5-4 majority amongst the Monetary Policy Committee members. Governor Bailey stressed that further cuts would depend on the continued evidence of waning inflationary pressures. A slow and steady rate cutting cycle awaits, in all likelihood. The consensus amongst economists is that there will be one further hike this year and five of them next year. But it’s not straightforward. The updated?BoE forecasts showed that the near-term direction of travel for inflation is up, with forecasts showing a rise to 2.7% by end of the year. While expected, it underscores the tricky messaging that lies ahead on inflation. Read more here.

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Taking its medicine. So what did 14 interest rate rises, taking Bank Rate to 5.25%, actually achieve? Well, the Bank of England set out its view last week and it has already reduced GDP growth by roughly 3% since the first rise 3 years ago. Most of that comes from lower household consumption, but higher rates also mean less?housebuilding and lower business investment. This drag on growth isn't over yet, rates are still in, what the?BoE Governor Andrew Bailey calls, restrictive territory, but the headwind is easing with this analysis suggesting a further drag worth about 1% still to come. Bitter medicine for the prize of taming inflation. Read more here.

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More encouraging signs on the growth story. UK lending and deposit data are on the up according to the latest data from the Bank of England. On the household front, household bank deposits picked up again vs May, but there was clear evidence of fading consumer caution in a significantly reduced pace of ad-hoc mortgage repayments. Further, the uptake of consumer credit remained close to its pre-pandemic pace, despite the slowdown seen over the month. Meanwhile, larger corporates significantly increased their loan uptake and external finance rose at a healthy clip. Overall, the picture is that of sentiment turning more positive, helping to power GDP growth. Read more here.

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The July Decision Maker Panel survey reveals cooling price pressures.Output price inflation eased to 4.2% (from 4.6%), with firms projecting a further decline to 3.7% over the next year. CPI inflation expectations also moderated, with one-year ahead forecasts dropping to 2.5% (from 2.8%). Wage growth, while still robust at 5.9%, is expected to slow to 4.1% within a year. Employment growth softened to 0.9% (from 1.1%), with muted expectations for the coming year. Borrowing costs remained stable at 6.8%, though firms anticipate some relief. Despite a slight uptick in overall uncertainty, concerns about sales and prices continued to abate. These trends give more support for the Bank of England's decision to cut its policy rate. Read more here.

House price growth edged up in July. Nationwide’s seasonally adjusted measure of house prices rose by 0.3% month-on-month in July from 0.2% in June, resulting in a pickup in the annual rate from 1.5% in June, to 2.1% in July - the fastest pace since December 2022. House prices rose again despite still-high mortgage rates, which fell slightly in June for the first time since January, to 5.16% from 5.19% and are expected to fall further. Housing market activity has been steady with mortgage approvals stable at around 60k per month. Excess supply is being absorbed as new buyer enquiries surpassed new instructions to sell. Affordability is still stretched but it is likely to improve gradually through a combination of wage growth outpacing house price growth and lower borrowing costs. Read more here.

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Digital infrastructure investment is booming. Infrastructure conjures-up images of roads & railways, energy networks and water pipes. In reality, digital assets play an equally pivotal role in modern economies (case in point: chaos owing to a recent CrowdStrike software update). New figures reveal?digital infrastructure investment surged 23%, to ￡9.2bn, in 2022. That’s the most since 2000’s dot-com bubble. It’s growing at the most rapid pace in two decades too; accelerating a long-term upward trend that even Covid-19 couldn’t dent. Intangible investment in the underpinning software and databases is poised to become the top digital asset class soon, after drawing level with telecoms equipment (each 1/3rd of the total). Investment in data centres, base stations and other host buildings saw most rapid growth though, hitting a record high (￡2.1bn). Read more here.

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What’s the latest in the US?

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Poor US jobs data increases pressure on Fed to cut rates. July's US jobs report indicates a cooling economy, with payrolls rising by just 114,000, below the expected 175,000. The unemployment rate rose to 4.3%, up from 3.5% a year earlier. Wage growth slowed to 0.2%, again below expectations. Private sector job growth was particularly weak, with only 97,000 jobs added in July, well below the previous 3-month average of 167,000, likely reflecting the delayed effects of earlier rate hikes. Softness in the US labour market data has been visible for a number of months, but it’s only just hitting the headline numbers which markets pay particular attention to. A timely reminder that the devil is often in the details. Read more here.

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But the Fed wasn’t ready to cut rates last week. The rates hold was in line with expectations, but Fed Chairman Powell said the time to cut rates is “approaching”, emphasising that the inflation and labour market data readings between now and the September meeting will be critical. The market volatility of recent days is down to concern that the Fed might be behind the curve in pivoting to cutting rates (recall it was accused of being late to respond to the inflation problem that began bubbling in 2021). And sentiment has indeed turned: markets think the Fed is now going to have to be more aggressive in its rate-cutting cycle to secure the long sought after soft-landing. Markets are now pricing in a 50bps rate cut in September. Last week it was one 25bps move. Read more here.

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What’s the latest in the Eurozone?

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Both economic growth and inflation rise in the Eurozone. GDP across the EZ rose by 0.3% in Q2, matching Q1’s pace and ensuring the economy is 0.6% larger than a year before. The national medals tables are: Ireland wins gold, at 1.2% q-on-q, Lithuania silver (0.9%) but Spain, the fourth largest economy, achieved a notable bronze, growing 0.8%. Laggards are Germany, Sweden and Latvia, where output fell. Annual CPI inflation in July ticked up, to 2.6% (from 2.5%), led by services (up 4%). A surprise perhaps, but probably not sufficient to spook the ECB into pausing rate cuts.? Read more here.