In recent months, it’s fair to say that there have been plenty of negative economic headlines. Whether it’s a 40-year high in inflation, rising interest rates, or the prospect of a looming recession, you may be concerned about the current global economy and the effect on your wealth.
To help you put current events in context, here’s a snapshot of how the global economy is performing and what it means for you.
The good news is that unemployment in the UK remains low – the Office for National Statistics reports that, as of March to May 2022, unemployment rates sat at 3.8%.
However, partly due to negative real-term wage growth, consumer confidence has hit a record low. Indeed, the UK’s Consumer Confidence Index fell to minus 40 in May, which, according to Growth from Knowledge, is the lowest score since the index’s inception in 1974.
Also, as you’ve likely seen, inflation has been climbing and is currently resting at 9.4% as of July 2022. Higher prices for everyday goods and services, alongside increasing energy costs due to Russia’s invasion of Ukraine, have helped spawn a cost of living crisis.
As is to be expected, retailers are being hit hard by this crisis, as consumers are less willing to spend money.
Retailers aren’t the only ones struggling amid rising prices though – UK stock markets have also taken a hit in the last few months.
Indeed, data from Google Finance shows that the FTSE 250 Index has seen a more than 6% decline in the six months to 15 August 2022. Information from the same source also indicates that the FTSE All-Share Index took a roughly 2.5% hit over the same period.
It is worth noting that, even though the two above indices have had a rocky few months, they are starting to show some signs of recovery. The FTSE All-Share, for example, has risen from 3,874 on 14 July 2022, to 4,149 on 15 August 2022, with the FTSE 250 experiencing similar levels of recovery.
Of course, in an attempt to combat creeping inflation, the Bank of England has been increasing the base interest rate, which now sits at 1.75% as of August 2022.
While this aims to encourage consumers to save more rather than spend, it is also fuelling higher mortgage rates.
And, according to the Guardian, with around 800,000 borrowers on tracker-rate mortgages and about 1.1 million on their lender’s standard variable rate (SVR), many people are now paying far more for their mortgages than they were previously.
The US is another country that has seen low unemployment rates in the past few months, and wage growth has even been strong. But, similar to the situation that is being seen across the globe, consumer confidence has dropped.
In fact, data from the OECD shows that the consumer confidence index in the US has fallen to a 16-month low of 96.5 where values below 100 indicate a pessimistic attitude towards future developments in the economy.
Much like the Bank of England in the UK, the US Federal Reserve has been attempting to combat rising inflation by boosting interest rates, which, as of August 2022, according to CNBC stand at 2.25% to 2.5%.
On the whole, US economic growth seems to be slowing down. According to data from Schroders, the composite purchasing managers’ index, which is an indication of the health of service sectors, fell from 53.4 to 51.6, and the manufacturing output declined from 55.2 to a two-year low of 49.6.
This economic slowdown is starting to have an impact on many sectors in the US, particularly the media, entertainment and auto sectors.
Stock markets in the US have taken a hit in the past few months. Data from Google Finance shows that the S&P 500 has seen a decline of around 4% in the six months to 15 August 2022, while the Dow Jones Industrial Average saw a drop of around 3.5% over the same period.
However, just as in the UK, there have been recoveries across the board during July.
For example, the Dow Jones Industrial Average jumped from 30,772 on 13 July 2022, to 33,710 on 15 August 2022, while the S&P 500 saw an increase from 3,790 on 14 July 2022, to 4,269 on 12 August 2022.
When it comes to the impact of Russia’s invasion of Ukraine, Europe has been hit especially hard.
Gas supplies coming into Europe from Russia have been seriously affected, which has caused prices to skyrocket. There have even been fears of gas shortages, but we are yet to see the full extent of this.
Gas supply issues could even go as far as fostering disunity between the European nations – the European Commission asked member states to reduce gas consumption by 15%, which was met with a certain level of opposition.
And, much like the rest of the world, inflation has been on the rise in the bloc. According to Statista, the rates of inflation for June 2022 in some of the largest European economies were as follows:
- France at 6.5%
- Germany at 8.2%
- Italy at 8.5%
- Spain at 10%.
In response to this, the European Central Bank delivered its first interest rate hike in over 10 years, which took the eurozone out of negative rates to 0.5%.
Even though eurozone GDP did look slightly positive in Q2 of 2022, recessionary fears still linger. One such indication of a recession was the value of the Euro, which briefly fell below parity with the US dollar, though it has since climbed again thanks to the European Central Bank’s rate hikes.
In fact, according to Bloomberg, the possibility of a recession resulted in the European Commission’s consumer confidence reading to fall to minus 27 in July, which is the lowest it has been since the start of the pandemic in April 2020.
The past few months have been rocky for European stock markets too. According to Google Finance, the Euronext 100 Index fell by a total of more than 3% in the six months to 15 August, France’s CAC 40 Index declined by around 6%, and Germany’s DAX Performance Index dropped by more than 10% over the same period.
Much like other stock markets around the world, European markets did see some recovery in July – the Euronext 100 rose by around 8% in the month to 15 August 2022, and the DAX Performance Index increasing by around 7% over the same time period.
It seems that Western fears of recession have seeped into Asia too.
Asian equities registered negative returns in the second quarter of 2022, with concerns surrounding global inflation, supply chain issues, and worries that Russia’s invasion of Ukraine could help usher in a new global recession.
Of all Asian economies in the MSCI Asia Quarter, South Korea was, according to Schroders, the worst performing, with the financial, tech and energy sectors hit particularly hard.
Share prices in Taiwan, India, the Philippines, Singapore and Malaysia also saw a hit due to the above issues, though strangely, share declines in Indonesia and Thailand were less severe.
Though, of all the Asian economies, China was the only one in the region to end the quarter on a positive note. In fact, according to JP Morgan, Chinese GDP during Q2 rose by 1% year-on-year, and exports to the West have risen significantly.
Even though it has been a relatively positive year for the Chinese economy, information from Google Finance shows us that stock markets have still been struggling; the Shanghai Composite Index dropped by more than 5% over the six months to 15 August 2022, and Hong Kong’s Hang Seng Index fell by almost 19% over the same period.
Meanwhile, it seems as though China is starting to get Covid under control. Restrictions are being relaxed following the outbreak of the Omicron variant, with Chinese government data showing that factory activity did, apparently, grow in June.
The Japanese economy, however, wasn’t so lucky. Indeed, the Japanese stock market ended the quarter lower than the previous quarter, with the value of the Yen dropping sharply against the US dollar.
What the condition of the global economy means for you
Even though the state of the global economy is uncertain, with many of the stock indices around the world having had a turbulent few months, they are starting to show signs of recovery following a relatively strong performance in July.
Regardless, it’s vital that you, as an investor, take a long-term view when investing for your future. It is easy to make emotional knee-jerk reactions based on short-term events, but being patient and focusing on your long-term goals can help you to ride out the current uncertainty.
Also, looking at the performance of economies around the world should highlight just how important it is to maintain a well-diversified portfolio.
Source: JP Morgan
The table above shows the year-to-date performance of some of the most popular stock indices around the world. As you can see, some indices performed better than others over the course of the year.
This is why spreading your investments is vital to mitigate as much risk as possible. For example, if you only invested in the US’s S&P 500 in 2022, it’s likely your returns would be lower than if you had invested in a range of shares, sectors, and geographical regions.
Get in touch
The global economy can have an impact on your personal finances, so if you would like to discuss how to manage your money amid rising living costs and fears of recession, please email us at firstname.lastname@example.org or call 01313 786680.