It’s been another uncertain three months in the world economy, with the politics of trade featuring heavily in the news. Brexit and the struggling High Street have continued to dominate the headlines in the UK, so here’s our look back at the last quarter.
Europe
Conservative leadership contest raises possibility of ‘no deal’ Brexit
The complications of agreeing a Brexit deal finally ended the tenure of prime minister Theresa May. The Conservative leader announced her resignation on 24 May before stepping down from the post after hosting US president Donald Trump’s visit to the UK in early June.
The battle to become the next prime minister has reached the final two, with Boris Johnson and Jeremy Hunt seeking the endorsement of Conservative party members. Johnson is the clear favourite to win the contest, which has once again raised the likelihood of a ‘no deal’ Brexit.
Despite a multitude of economic warnings, Johnson has repeatedly said that he believes Britain should leave the EU on 31 October “with or without a deal”. With Donald Tusk having ruled out a renegotiation of the withdrawal agreement, and an Institute of Directors survey revealing just 23% of businesses have prepared contingency plans for ‘no deal’, the outlook remains hugely uncertain.
Johnson’s comments saw sterling sink to a five-and-a-half-month low against the US dollar, and to its weakest level since January against the euro. In addition, UK business investment is set to suffer its biggest cut in a decade, with the British Chamber of Commerce forecasting a 1.3% fall as companies focus on putting resources into contingency planning and stockpiling, rather than investing in new ventures.
The news from the Eurozone has also been pessimistic. German factory orders are suffering, with year-on-year orders down by 8.6%, the worst drop since 2009. Combined with the weakest June performance in the labour market since 2002 and disappointing retail sales, there are fears that a recession could be around the corner.
Manufacturing in the Eurozone is also struggling. The latest Purchasing Manager’s Index (PMI) showing new order and output in Spain dipped below 50 (the line that separates growth from contraction) for the second time in 2019.
UK
There were mixed signals in the UK, with Brexit stockpiling having flattered the first quarter’s GDP statistics.
While unemployment continues to sit at record lows and consumer prices fell to 2.0% – the Bank of England’s target – there were more negative stories elsewhere. Economic activity contracted sharply in April, in part due to a temporary shutdown at car manufacturing plants, while manufacturing PMI dived into contractionary territory in May for the first time in several years on lower export orders.
Overall, the FTSE rose by 2% in the quarter, from 7279.19 in April to a close of 7425.63 at the end of June.
The problems on the UK’s high streets continued this quarter with several more high-profile retailers either falling into administration or coming perilously close.
Jamie Oliver’s chain of Italian restaurants collapsed in May, with 22 venues closed, resulting in the loss of 1,000 jobs. Fashion retailer Select appointed administrators in May, putting its 169 stores and 1,800 employees at risk. And Debenhams, one of the UK’s best-known retailers, went into pre-pack administration in April. 50 stores have been earmarked for closure, potentially costing 4,000 jobs.
In a challenging retail environment, Monsoon Accessorize has asked landlords to reduce rents on more than half of its 258 leased stores because current costs were “unaffordable, given the fundamental changes that have taken place in the retail sector”.
Perhaps the highest profile retailer currently struggling is the Arcadia Group, owned by business mogul Sir Philip Green. His retail empire narrowly avoided collapse in June as creditors approved a restructure that will see Arcadia close an initial 50 stores and cut rents on almost 200 more. 1,000 jobs will be lost as part of the measures.
Health and beauty giant Boots has announced it plans to close 200 stores to cut costs, while travel giant Thomas Cook issues its third profit warning of the year as its share price slumped to less than 10% of its value in 2018.
Consumer confidence stood at -13 points in June, worsening from May’s position and suggesting that consumers are broadly pessimistic.
One final piece of retail news this quarter was the decision by the Competition and Markets Authority (CMA) to block the proposed merger between Sainsbury’s and Asda.
Stuart McIntosh, the chair of the CMA inquiry group, said: “It’s our responsibility to protect the millions of people who shop at Sainsbury’s and Asda every week. We have found this deal would lead to increased prices, reduced quality and choice of products, or a poorer shopping experience for all of their UK shoppers.”
The news saw Sainsbury’s share price fall to its lowest level since the 1980s.
US
The volatile nature of US markets can be summed up in the headlines of two investment reports this quarter:
- April – “The US equity market reached fresh record highs in April”
- May – “The US equity market delivered its worst May return in seven years”
Overall, US stocks rose 3.7% in the second quarter of 2019. While nowhere near as impressive as the double-digit rises in the first quarter, the year-to-date returns are impressive. The S&P 500 reached an all-time high towards the end of June and the broad market index continues to flirt with record levels.
The latest University of Michigan consumer confidence results rose to 98.2 at the end of the quarter – a health level – and house prices have also been strong. Unemployment rates are still low and business profit margins are historically high.
The threat of trade wars with US rivals has led to continued uncertainty as the President used threats of tariffs as a key part of his political strategy.
China introduced new tariffs of up to 25% on $60 billion of US goods in June, a retaliation for the US doubling tariffs on $200 billion of Chinese goods in May. China had previously imposed tariffs of between 5% and 10% on 5,140 US products.
The escalation had a short-term effect on stock markets in both the US and Asia, but seems to have done no lasting damage.
The trade war between the US and China also escalated when Trump signed an executive order adding Chinese tech giant Huawei to the US Department of Commerce’s Bureau of Industry and Security Entity List. This move effectively banned the world’s number one telecom supplier from US communications networks.
The US President also threatened to impose tariffs on neighbours Mexico. However, assurances from the Mexican government that they would tackle issues relating to migration saw Trump back down, although this is set to be reviewed at the end of July. Poor results on lowering migration could see the President impose escalating, blanket tariffs on Mexican goods.
Asia
An unexpectedly convincing win for Narendra Modi’s Bharatiya Janata Party (BJP) in the Indian election briefly sent the country’s stock markets to a record high.
India’s benchmark index, the Sensex, surged 900 points to cross 40,000 for the first time ever in May after early poll counts gave Modi’s party and its allies a big lead. The country’s other major stock index, the Nifty, also hit record highs.
However, analysts believe that this rally will be short-lived as the country comes to terms with realities regarding the slowing world economy. Prime Minister Modi also has internal problems in his in-tray.
An employment survey report that was leaked to the press after the government withheld its release suggested that India’s state of unemployment is at a record 45-year high, while a leading economist has suggested that India’s gross domestic product (GDP) is currently being overstated by about 2.5% annually.
Consumer spending in the country is also slowing with sales of cars and SUVs slumping to a seven-year low and demand for bank credit falling. All this points to lower consumer confidence with could have a serious impact on the world’s sixth-largest economy.
Going forward
Although there is a lot of doom and gloom in the UK and the rest of the world, the markets have been mostly positive in the last three months.
Rises in the market in the first half of 2019 have more than made up for falls in value at the end of 2018, with US stocks performing particularly strongly.
However, despite positive returns, it remains an uncertain time and this could well result in fluctuations in value in the coming months.
Investments carry risk. Their value (and the income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
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