City thinking, local knowledge

May Market Commentary

By Questa Chartered

Over recent months, growth has remained sluggish in many parts of the world, but there are signs that the worst of the inflation crisis might be over. Let’s take a closer look into key markets around the world and explore their recent developments in our Questa May Market Commentary.

The International Monetary Fund (IMF) has praised the global economy’s resilience, highlighting that despite many bleak forecasts, a global recession was avoided, the banking system showed strength and major emerging markets did not face sudden stops. Yet, the global economy isn’t quite where everyone wants it to be, with cautious optimism prevailing.

Focus on the UK: Mixed Signals

The UK economy showed slight growth, with a 0.6% growth in Q1 2024. Chancellor of the Exchequer Jeremy Hunt expressed hope that the country is moving out of recession, citing these figures as positive indicators. Additionally, inflation fell to 3.2% in the year to March, the lowest in two-and-a-half years.

The Bank of England’s Monetary Policy Committee has kept interest rates steady at 5.25%. This decision followed heavy criticism from former US Federal Reserve Chairman Ben Bernanke, who led a review into the Bank’s forecasting methods. Bernanke’s report highlighted significant inaccuracies in the Bank’s predictions, blaming outdated tools. Governor Andrew Bailey has committed to implementing Bernanke’s recommendations.

The Business Landscape: Challenges Persist

UK businesses are experiencing a tough trading environment despite some economic improvements. The British Chambers of Commerce’s latest quarterly outlook revealed that 56% of firms expect turnover to increase over the next year, unchanged from the previous quarter. Meanwhile, the proportion of businesses expecting profit growth remained stagnant, increasing marginally from 47% to 48%.

Worryingly, 46% of businesses anticipate raising prices over the coming year, likely due to new post-Brexit UK border controls introduced at the end of April. These controls could add 10% to import costs in the first year, costing British businesses £2 billion, according to Allianz Trade.

The retail sector presented a mixed picture. The British Retail Consortium and KPMG reported a 3.5% year-on-year rise in sales value for March, partly attributed to an early Easter. Supermarket giant Sainsbury’s outperformed expectations with a 1.6% rise in underlying pre-tax profits to £701 million.

Conversely, the Office for National Statistics reported a 3.7% fall in sales volumes at department stores in March. High street fashion retailer Ted Baker announced the closure of 11 stores, with four more to follow, after falling into administration. Additionally, Premier Inn owner Whitbread plans to cut 1,500 jobs and reduce its number of branded restaurants.

Banking and Technology Sectors: Significant Developments

In the banking sector, Coventry Building Society’s potential £780 million takeover of The Co-operative Bank would make it the UK’s seventh-largest lender. Meanwhile, Lloyds Banking Group’s pre-tax profits fell to £1.6 billion in Q1 2024, down from £2.3 billion a year earlier, due to increased competition among mortgage lenders. HSBC’s Group Chief Executive Noel Quinn announced his retirement after nearly five years, coinciding with a 1.8% drop in the bank’s quarterly profit year-on-year.

In a major blow to London’s stock market, energy giant Shell is reportedly planning to leave London for a New York listing, citing US investors’ more positive stance on fossil fuels.

The tech sector continues to evolve rapidly, with Microsoft opening a new London office focused on artificial intelligence (AI) research and development. Microsoft AI’s Chief Executive Mustafa Suleyman emphasized the company’s commitment to long-term investment in the region.

However, the UK’s Competition and Markets Authority warned that big tech’s dominance in the AI market is concerning. Sarah Cardell, Chief Executive of the watchdog, stressed the need to balance the technology’s benefits with safeguards against potential market power exploitation.

European Outlook: Signs of Improvement

The eurozone economy, after a period of stagnation, is showing signs of improvement. A European Central Bank (ECB) survey predicted 0.5% growth in 2024, followed by 1.4% in both 2025 and 2026. Inflation is also expected to decline to 2.4% in 2024 and 2% in subsequent years, aligning with the ECB’s target. Despite keeping interest rates at a record high of 4.5%, the ECB noted easing inflation pressures, particularly in food and goods prices

Germany, a recent cause for concern, revised its economic growth forecast for 2024 from 0.2% to 0.3%, reflecting slight cyclical improvement. The country’s return to growth has boosted private sector activity in the euro area, with the S&P Global Purchasing Managers’ Index rising to 51.4 in April.

France is also seeing increasing business confidence. A Bank of France survey of 8,500 businesses predicted 0.2% growth in the first quarter. However, public debt remains a concern, despite credit rating agencies Moody’s and Fitch leaving France’s ratings unchanged. To drive growth, President Emmanuel Macron’s government unveiled a bill to cut red tape affecting businesses, aiming to simplify administrative burdens.

US Economy: Mixed Signals

The US economy saw a slowdown in growth in Q1 2024, with GDP growth dropping from 3.4% in Q4 2023 to 1.6%. Inflation also rose from 1.8% to 3.4% over the same period. This has sparked speculation about the Federal Reserve’s next moves on interest rates, currently at 5.25% to 5.5%. Analysts are uncertain about rate cuts, given the slow deceleration in growth and rising inflation.

Despite economic challenges, the US job market remains robust, with over 300,000 jobs added in March, the largest monthly gain in nearly a year. However, small business confidence is waning, with the National Federation of Independent Business reporting a third consecutive monthly decline in its optimism index.

Far East: Strong Performance Amid Challenges

China’s economy continued to perform strongly, with 5.3% growth in Q1 2024, surpassing analysts’ expectations. However, consumer confidence is waning, as retail sales growth fell to 3.1%. The property sector remains troubled, with real estate developers Shimao Group and Country Garden facing significant financial challenges.

In Japan, the yen hit a 34-year low against the US dollar before rebounding. Economic difficulties persist, with real wages falling for the 23rd consecutive month in February and corporate bankruptcies rising significantly. The construction and service sectors have been particularly affected.

Emerging Markets: Growth and Challenges

India’s economy is projected to grow by 6.1% in 2024, down from 7.7% in 2023, according to Moody’s Analytics. The country’s M&A market is booming, with 427 deals worth over £20 billion in Q1 2024.

Russia’s economy is expected to outpace several Western nations this year, with GDP predicted to rise by 3.2%. However, sanctions are causing long-term challenges, including increased dependence on China and rogue states for defence output.

On the financial markets, India’s BSE Sensex rose by 0.63%, Russia’s MOEX increased by 4.04%, while Brazil’s Bovespa fell by 0.89%.

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