In July, the UK manufacturing industry experienced a further decline as output, new orders, and employment all saw accelerated falls, as per the most recent economic data. This downturn marked the sector's worst performance (accounting for 10% of the UK economy) since May 2020, according to the highly regarded Purchasing Managers' Index (PMI) from S&P Global/CIPS UK Manufacturing.
The UK economy has shown sluggish growth since 2019, even before the pandemic, leading one economist to describe it as "listless." In May, it contracted by 0.1%, partially attributed to the extra bank holiday for the King's Coronation, resulting in one less working day than usual. Moreover, households and businesses have been under pressure due to the increasing cost of living and higher interest rates. Shrinkage in the economy can result in job losses and difficulties in obtaining pay raises that match inflation. The current inflation rate, which measures the annual rise in prices, stands at 8.7%. The eurozone's economy has experienced a positive turnaround following a prolonged period of stagnation, coinciding with a decline in inflation within the 20-member currency area from its peak last year.
Additionally, there has been a revision to the previous gross domestic product (GDP) data, revealing that the earlier reported recession, based on initial estimates in June, was narrowly avoided. Initially, it was stated that the economy contracted in the last quarter of 2022 and the first quarter of this year. However, the revised figures showed that instead of a contraction, there was 0% growth in January to March.
Despite this news, Investors are increasingly placing bets on Europe facing a challenging economic downturn, a stark contrast to the prevailing belief in financial markets that the US is heading for a more gentle economic slowdown ("soft landing"). Over the past two weeks, the euro has depreciated against the dollar, the earlier surge in European shares this year has come to a halt, and German government bonds, typically sought as a safe haven during stressful times, are increasing in value.
According to a senior director from a top credit ratings agency, the "erosion of governance" in the US, fueled by Donald Trump's efforts to overturn the 2020 election and the increasing political polarization, played a role in the agency's decision to downgrade US debt. Fitch downgraded the US debt rating on Tuesday, marking only the second instance in history where a leading credit agency has taken such action. The first occurred in 2011 when Standard & Poor's, a competitor of Fitch, downgraded the US's triple-A rating following a tense dispute between the Republicans and the Obama administration over the federal budget.
Analysts believe the Bank of England might slow down the pace of interest rate hikes today. However, investors anticipate that the central bank will tighten its monetary policy for a longer duration compared to both the European Central Bank and the US Federal Reserve. Following a larger-than-expected drop in UK inflation in June, traders believe that the BoE's Monetary Policy Committee is more inclined to implement a 0.25 percentage point interest rate hike rather than opting for a more substantial 0.5 percentage point increase.
The news of slowing interest rates for the UK has weakened the pound over the past few days. GBPUSD was as high as 1.30 last week but now resides at 1.2650, whilst GBPEUR sits at 1.1580. The Euro has weakened against the dollar and now resides at 1.0920.
