UK Public finances weaken

August 27, 2019

The UK public sector net borrowing data for July was released last Wednesday, showing that the usual July surplus was lower than last year. Furthermore, while the UK government received £1.97bn more than it spent in July, it was £0.7bn less than expected. The desire for fiscal loosening by the government and the need to invest into no deal Brexit preparations has increased government expenditure, while weaker than expected tax receipts also impacted the net position. Borrowing for the first four months of the fiscal year is now £16bn, some £6bn more than the same point last year. While the Office for Budget Responsibility were expecting an increase in borrowing, it is now likely that total borrowing will exceed the £29.3bn they pencilled in at the start of the year. The strength of the public finances over the last several years does mean that there is scope for looser fiscal policy, although with government debt to GDP at over 80%, fiscal discipline will still need to be implemented eventually.

Federal Reserve Chair Powell at Jackson Hole

The Federal Reserve’s annual Jackson Hole symposium saw Chairman Powell make a speech on Friday. While his remarks did not give away anything concrete, markets reacted as they tried to take his guidance on the future movement of US interest rates. Messages on the committee’s concerns over the US-China trade war and the state of the global economy conflicted with the upbeat tone towards the US consumer. It did not help that earlier in the day China announced that it intended to retaliate to the latest tariff increases with levies of their own. Nevertheless, while it appeared that Powell was appeasing recent downward moves in bond yields, there was little new news in his speech, confirming that the Fed will continue to be reactive to economic data. The next Federal Reserve interest rate decision is in a little over three weeks, where the committee is expected to make a further 0.25% cut.

Eurozone PMIs better than expected

Purchasing Managers Indices (PMIs) for the Eurozone were released last week showing that the single currency area continued to struggle in August, with several indicators pointing to further contractions in some areas of the economy. However, the silver lining was that in many instances the weakness was less than anticipated by analysts and the rate of deterioration was slowing. Optimistic observers will be hopeful that the data is now reaching lows and a turnaround if likely over the coming months. However, early indicators from Germany continue to show significant weakness, particularly in the manufacturing sector, where they are heavily dependent on Chinese demand.  With a contraction in Q2 GDP now confirmed, a technical recession in Germany (two consecutive quarters of negative growth) is becoming increasingly likely.

Market Data

  % 1w* % 1m*
UK -0.23% -4.35%
US -2.48% -3.37%
Europe ex UK -0.66% -2.74%
Japan 0.46% -0.49%
Emerging Markets -0.7% -5.81%
Oil 0.05% -4.69%
Gold -0.12% 9.83%