What does the latest economic data mean for the UK?

Spotlight: Year of the Wood Dragon - Five Investment Take-aways from Old Chinese Proverbs

On 10^th February, throughout China and the rest of the world, celebrations were held to bring in the Chinese New Year. In the Chinese language, proverbs are commonly used. Proverbs are short, traditional sayings that express a piece of wisdom or advice. We have picked out five Chinese proverbs below that could be applied to investments, alongside some situational examples in italics:
 

1.  Throwing meatballs to fend off a dog (肉包子打狗) –Align the investments you choose to your desired outcomes.

2.  A horse is best tested on a long road (路遥知马力) –Do not judge performance over short time periods.

3.  The player in the game is the most confused (当局者迷) –Investing can be a complex task but seeking professional advice can help ensure that the right investment decisions are made.

4.  The wind won’t always be behind you (风无常顺) –Throughout an investment journey it’s important to remain flexible and to have investments that will protect the portfolio from negative shocks.  

5.  A thousand-mile journey starts with a single step (千里之行，始于足下)   Investing may not always seem rewarding in the short term but can help bring financial goals to fruition in the future, so well done for taking the first step.

The chart below shows Chinese GDP growth over time, adjusted for inflation - above the line shows how much the economy is expanding, and below the line shows how much the economy is contracting.

2024 marks the Year of the Wood Dragon, believed to symbolise growth, expansion, and an upward surge of energy. Will these symbolisms translate to the Chinese economy and equity market performance? The current forecast is that China faces a challenging longer-run growth outlook and we have recently seen lots of variation in GDP (Gross Domestic Product). GDP is used to measure the size and health of a country’s economy, over a specific time period.

 

Pre-pandemic growth in China was smooth and we saw a period with a relatively high degree of certainty in economic outcomes. However, the onset of COVID-19 lockdowns, coupled with a weak property market meant that household expenditure began to decline, and GDP fell into negative territory. China implemented measures to control the spread of the virus and stimulate economic recovery and benefited from strong exports. Industrial production in China was strong and consistent which was driven by persistent global demand for Chinese goods and services. By 2022, industrial output growth had begun to slow, relative to its pre-COVID performance. Last year there was some evidence of another rebound in GDP growth, largely attributed to their ‘reopening’ (relating to the end of their extended period of COVID-19 restrictions) and the easing of health-related policies. According to analysts, China’s real GDP growth rate of 5.2% in 2023 came in lower than expected. Whether we will see growth, expansion, and an upward surge of energy within the Chinese economy in 2024 remains to be seen. In the meantime, we can take inspiration from some of the Chinese proverbs by retaining a long-term focus, being patient investors and retaining flexibility to react to whatever the markets throw at us.  

The Noise​

• US consumer prices rose more than expected in January, as the consumer price index (CPI) increased 0.3% in January. All three major US stock indices fell more than 1% following the data release Tuesday. The increase in prices was the largest in four months and occurred against the backdrop of labour market strength and economic resilience. Some market participants noted January is typically a strong month for inflation, as businesses push through price increases at the start of the year. The surge in the cost of rental housing accounted for more than two-thirds of the rise in CPI, as food prices were also impacted by winter storms. The up-tick in inflation did not change expectations of a Federal Reserve rate cut in the first half of 2024 but the dollar did rise against a basket of currencies.

• Japan saw its Gross Domestic Product shrink for the second straight quarter, pushing it into a technical recession. In doing so, it lost its title as the world’s third-biggest economy to Germany, which is also struggling with economic growth. Consumption and capital spending are both key pillars of demand yet have both been sluggish through 2023. The Bank of Japan has been laying the groundwork to end negative interest rates by April and tweak other aspects of its ultra-loose monetary framework, but the latest data has cast doubts over the likelihood of such changes.

• America’s environmental, social and corporate-governance (ESG) hiring boom is starting to slow down as finance executives assess costs and seek faster returns on investment. ESG job departures exceeded arrivals for half the months of 2023, signalling the reversal of a multiyear trend. Tech, financial-services and consulting were particularly active with ESG departures, as broader cutbacks and layoffs contributed to the decline in those sectors. Meta Platforms, Amazon and Google in particular had some of the largest ESG job outflows among US companies. A drop in hires doesn’t mean that ESG has been de-prioritised. Many businesses will continue to follow sustainability commitments but are just changing how they handle their internal ESG programs.

The Numbers

The Nuance

It was a big week for measuring the state of the UK economy, with the latest data on unemployment, wage growth, inflation, and Gross Domestic Product (GDP) all released.

Starting with Tuesday’s data from the Office for National Statistics (ONS), the UK’s unemployment rate declined to 3.8% in the fourth quarter of 2023. This is down from 4.1% in the third quarter, and slightly below the market consensus of 4.0%. British wages grew at the weakest pace in 14 months in December, up 6.2% versus expectations of 6.0% growth. The two data points from Wednesday show that labour markets remain tight, as businesses struggle to find and retain staff. The concern remains for the Bank of England (BoE) that labour markets have not cooled sufficiently, making a sustainable return to the 2% inflation target more unlikely. Investors resultantly scaled back their bets on BoE rate cuts, with sterling up against the dollar and euro on Tuesday.

It was inflation’s day in the sun on Wednesday, where it unexpectedly held steady at 4.0% in January. This defied forecasts that anticipated an increase to 4.2%. Reversing some of the moves in markets on Tuesday, sterling weakened against the dollar and euro, and investors topped up bets on the BoE cutting rates this year. “Inflation never falls in a straight line” said finance minister Jeremy Hunt, but the latest inflation data should reassure the Monetary Policy Committee that the time to start cutting rates is approaching.

Lastly, ONS data released on Thursday showed UK GDP contracted 0.3% in the fourth-quarter of 2023. This has put the UK into a technical recession, which happens when GDP contracts for two consecutive quarters. The fourth-quarter contraction was deeper than economists had estimated, which pointed to a 0.1% decline. Following from Wednesday, sterling weakened further against the dollar and euro and investors added to their bets on BoE rate cuts. All in all, data this week has likely increased the odds of the BoE cutting borrowing costs sooner rather than later.

All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.

Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice.