By A slick of worry is growing about the darkening prospects for global growth as economies slow around the world, pushing down oil prices in expectation of lower demand.
The benchmark Brent Crude fell back to below $94 a barrel, to a level it was last at in February, amid worries China’s recent weakness will persist and that rampant inflation will cause consumers and companies elsewhere to cut back expenditure.
Just as the suffocating heat of European heatwaves has been replaced by downpours, the accelerating global downturn will douse cold water on already tepid economies, with a bitter chill expected to spread in the months to come.
UK unemployment held steady at 3.8% but there are already signs that the hot jobs market is cooling with the number of vacancies falling for the first time since the pandemic dug in during the summer of 2020.
Already it seems companies are being more cautious in their hiring, with a recession set to take hold in the UK amid the energy crisis, with consumers struggling to pay mounting bills.
There is little in the way of help from higher pay packets with wages dropping even further behind inflation in the year to June.
It’s been a lacklustre start for the FTSE 250, which is more sensitive to the fortunes of the UK consumer, but the FTSE 100 has had a stronger opening, taking its cue from another positive session on Wall Street.
Given the challenge ahead for the global economy there is a an expectation that the US Federal Reserve, in the face of the slowdown, will turn down the dial on interest rate rises.
Speculation has risen that inflation might have peaked given the pace of price increases eased in July.
That has helped lift sentiment towards growth stocks and helps explain why the S&P 500 has been on a winning streak, given that a lower interest rate environment would boost the value of future earnings.
Hope is growing that the US may avoid recession, but big risks remain and inflation is still a wild threat yet to be tamed.
A closely watched financial conditions index which reflects the availability of funding in an economy compiled by Goldman Sachs is shining a light on the risks.
It indicates that despite the Fed’s swift moves to rein in inflation, financial conditions haven’t tightened, instead they have loosened with more funding available than would be expected at a time of a rapid pace of rate rises which are designed to squeeze out liquidity.
The consequence of investors’ expectations that the Fed may go softer on rate rises, is that they could counteract the Fed’s attempts to rein in inflation, which could push it into taking a more aggressive stance.
Despite China’s fragility, commodity giant BHP Billiton sees it as the more reliable source of revenue ahead, while other advanced economies face more of a struggle amid rising inflationary pressures.
BHP’s pre-tax annual profits tripled mainly due to soaring coal and copper prices over the year.
But weaker commodity prices especially for industrial metals remain a risk for the miner ahead especially given worries about China’s property sector, although it’s strong cost control and low cost operations should give it resilience amid the uncertainty.
Walid Koudmani, chief market analyst at financial brokerage XTB comments:
“Today’s Average Earnings Index showed a fall in real wages at a record level as inflationary pressures and the cost of living crisis continue to reduce buyer spending power.
This further highlights the importance of a suitable strategy by the Bank of England and government who may attempt to normalise the economic situation despite increasing recession concerns.
The economy continues to be in a difficult spot as it remains stuck between serious supply and logistics concerns and attempting to rebound from historically low interest rates.
Meanwhile, employment figures showed a slow decrease compared to the previous three month period which corresponded to a slight increase in the unemployment rate.
All things considered, this is troubling news as it could indicate a slowdown in the job market which coupled with rising prices may lead to a serious drop in demand and ultimately impact most aspects of the economy.”
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