The strong start to the year continued into this week with both equities and bonds rallying. Well received US inflation data, coupled with stronger than expected UK GDP data has supported the thesis that inflation will continue to fall, and central bank policy will become more accommodative, while the positive economic growth coming from the UK offers some hope that any recession or slowdown will only be mild.
UK GDP data was released this morning, coming in above forecasts of -0.2% at 0.1% (month-on-month for November). Year-on-year for November was also 0.2%, confirming modest growth and reducing the chance that the UK has already dipped into recession. The men’s football World Cup had a significant part to play in the positive growth exhibited by the UK as pubs and bars were flooded, boosting the economy. While growth is positive, UK core inflation still remains high at 6.3%. UK Chancellor Mr Hunt believes their plan is working with the promise made to “halve inflation this year so we can get the economy growing again”.
US inflation was the most anticipated data release this week. Inflation came in at 6.5% (year-on-year) for December, lower than the previous figure of 7.1%. This is the sixth consecutive month of lower inflation data. On a month-on month basis for December inflation came in at -0.1%. The inflation data has led the market to now price in only a 0.25% increase of interest rates at the next US Fed meeting, as opposed to the 0.5% rise that was previously expected. It appears that the aggressive interest rate hikes in 2022 are now feeding through into the inflation data releases. We are also seeing supply chain pressures ease, further supported by the reopening of China.
Germany appears to have significant labour shortages, and more than half of Germany’s companies are struggling to fill vacancies. The biggest reason is seemingly due to a lack of skilled workers with almost two million vacancies unfilled, this is estimated to be nearly Є100 billion of output foregone. The skilled worker shortage appears to be within the mechanical and electrical engineering sector. The planned energy transition and infrastructure build out within the country could be delayed due to these labour shortages.
Volkswagen (VW) reported its lowest sales last year for over a decade as China Covid lockdowns and the Russia / Ukraine war halted supply chains. The German group, whose brands range from VW to Audi and Bentley delivered 8.3 million vehicles to customers last year. However, chip shortage issues have led to a very high order backlog with hopes that China’s reopening will lead to a production increase.
At the start of each year there are many economic commentators predicting what might occur in the year ahead. While we think making bold predictions is a dangerous game, we were struck by a comment in Havelock’s latest commentary as it aligns with many of our own philosophies and beliefs (their global equity fund is in portfolios) – “We will strive to remain humble and move forward wanting, as always, to own a portfolio that will be robust in a range of future economic scenarios.”
Nathan Amaning, Investment Analyst
Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.