“If there is no struggle, there is no progress” – Frederick Douglass
This week the Bank of England (BoE) announced its decision to maintain the status quo, voting by 6-2 majority to hold rates at 0.25% – a shift from the last meeting when three members dissented in favour of a hike. In the wake of recent UK macroeconomic data, which has indicated a slowdown in growth, the announcement was widely expected. Governor Mark Carney repeatedly warned that Brexit was the biggest challenge to the UK economic outlook, with uncertainty weighing heavily on business investment and household spending. Accordingly, in its accompanying Inflation Report, the BoE revised down its 2017 GDP growth forecast from 1.9% to 1.7%. While the BoE also guided that rates were in fact likely to rise at a faster pace over the next two years than markets were anticipating, given that inflation is still forecasted to be above the Bank’s 2% target by 2020, its rhetoric was perceived as largely dovish. Sterling immediately fell against the Dollar and the Euro on the news.
Meanwhile, across the Channel, the European economic recovery has been gaining steam. Advance estimates indicate that annual Eurozone GDP improved 20 basis points to 2.1%, the highest rate since the second quarter of 2011. Quarterly GDP growth looks set to have accelerated from 0.5% to 0.6% in the second quarter of the year, twice as fast as the UK over the same period, with provisional accounts suggesting a 0.5% increase in France and a hefty 0.9% growth in Spain. The labour market also showed signs of improvement – the unemployment rate fell to 9.1%, the lowest level since February 2009, with improvements in Italy and Spain as well as a number of smaller member states. The manufacturing sector had a strong July across a number of countries – although growth appears to have slowed a little from the second quarter – with the Purchasing Managers’ Index (PMI) signalling increases in output and new orders, as well as a surge in job creation in the sector. At a reading of 50.5, Greek manufacturing PMIs also moved back into expansionary territory (a reading above 50 signals improving conditions and the closer the figure moves to 100, the faster activity is growing). Finally, retail sales beat expectations and increased by 0.5% in June, pushing annual growth 0.7% higher to 3.1%.
Overall, these latest releases highlight a more broad-based economic improvement across the Eurozone, which will hopefully translate to a lift in inflation. Advance estimates indicate that, while headline inflation is likely to be unchanged at 1.3% in July, core inflation (which strips out volatile energy and food prices) has been edging higher for a second consecutive month. The European Central Bank (ECB) could view this as an indication that inflation is on a sustainable path back towards its 2% medium-term target. Indeed, markets are brimming with speculation that the ECB will use this as a reason to start tapering its asset purchase scheme as soon as September.