Market report: Britian’s lacklustre growth, Hays cuts profits forecast and US inflation in focus
Susannah Streeter, head of money and markets, Hargreaves Lansdown: “Relief that the UK economy has returned to growth combined with expectations that central banks will hold off from fresh rate hikes have put the FTSE 100 on the front foot in early trade. But with yet another recruiter, Hays, indicating increased caution among companies to hire, sentiment is likely to stay highly sensitive.
UK still grapples with stagflation
The UK eked out growth in August, but only just, demonstrating how the burden of high borrowing costs and the wider cost-of-living crisis is still weighing hard on consumer and company sentiment. The picture being painted by this numbers is of an economy only just grinding forward, with the services sector accounting for any growth while production and construction activity has fallen sharply. We still haven’t felt the full effect of previous rate hikes, and so the prospects of recession are still looming on the horizon with so little respite expected on sideswiped budgets. At the very most, it appears the UK is in a period of stagflation, with the economy stagnating while inflation stays elevated. It does represent a significant recovery though from July although growth for the month has also been revised down to 0.6% from 0.5% indicating that the combination of strikes and poor weather was even more toxic than first thought.
As the rain continued though August, combined with a squeeze on budgets August proved to be a very dismal month for the arts, entertainment, and recreation industry. Overall activity in this sector of the economy fell by 7.4%. Downpours disrupted festivals and outdoor arts events and sporting fixtures, with wellies and mud a difficult substitute for hoped for sandals and sunshine. Activity in services was supported by an end to the teachers strike, as holidays aren’t counted, and also a boost in business for consultants, architects, engineers and laboratory testing.
With little momentum in the economy and plenty of risk that the hike in borrowing costs will take a greater toll during the months to come, Bank of England policymakers look set to keep the pause button held on interest rate hikes.
Hays forecasts fall in profits.
Results from Hays indicates the increased nervousness among candidates to move positions and companies to make decisions on longer-term hiring. The recruiter forecast a fall in first half profit after quarterly fees fell 7% as confidence about moving jobs wanes. It’s the third UK based recruiter in a row to report a drop in business, following Page Group and Robert Walters, as companies turn more cautious. Given the uncertain economic outlook amid continuing inflationary pressures, it’s not surprising that more companies are reluctant to take on permanent staff. With the economy so fragile, firms are cautious about what the future may hold, and are filling gaps in their workforces with more temporary staff. This will be due to budgetary constraints and to give them more flexibility over wage costs, if conditions take a turn for the worse.
US inflation in focus.
Wider market sentiment is hinging on hopes that ultra-cautious stance being adopted by the Federal Reserve will mean that another interest rate rise is less likely. Although minutes from the US central bank’s September meeting indicated the door is still open to one more hike to bring down demand, the behaviour of bond markets might be doing the job for them. The shooting up in Treasury yields, making borrowing more expensive across the economy, is already likely to dampen activity. Those yields are coming down in expectation that policymakers might go easier on interest rates, but they are still set to be restrictive on growth. Producer price rises are heading in the right direction, down from 0.7% to 0.5% in September but it’s a bit more slowly than hoped. All eyes will be on the key consumer price figures out later, and if the core rate in particular keeps nudging down, the relief rally we have seen may continue for now but expect a volatile path for equities ahead. It’s a reminder to keep portfolios well diversified to ride out short-term ups and downs.’’
