There was good news for the UK economy this week, which grew faster than expected in May. Although a lagging indicator, it was good all the same to see an expansion of 0.4% posted, double the consensus forecast of 0.2%. Retailers and wholesalers posted a positive month after a weak April, the latter being put down to the wet weather. Whilst house building and infrastructure helped to buoy the construction sector, it continued to be the service sector which led the way. Year on year the economy grew 1.4%, ahead of the consensus forecast of 1.2%.

In the US the focus was on inflation numbers, with the release of the rate for June. As expected, this continued to move lower towards the 2% target, albeit at a very slow pace. Year on year inflation stood at 3%, which was down from the previous month reading of 3.3% and was below the consensus forecast of 3.1%. There was a slower rate of inflation for energy costs, shelter and transport, whilst the prices for new and used cars continued to decline. Service sector inflation continues to be the main contributor.

The key question is whether a move down to 3% is enough to convince the US Federal Reserve that it is time to start making interest rate cuts. If they were to start to cut there would undoubtedly be a sigh of relief from US companies, smaller ones in particular, where higher for longer rates appear to be having a negative impact. This is likely due to smaller companies tending to have a higher proportion of floating rate borrowing compared to fixed rate borrowing, like their larger company counterparts. A figure to watch is US bankruptcies, where filings to the end of June are above that seen in 2020 and the highest level since 2010.

Inflation is certainly not an issue in China. If anything, it is the potential threat of deflation. In June the inflation rate was -0.2% month on month, worse that the expected rate of -0.1%. This is the second consecutive negative reading and the third in the last four months. Year on year a rate of only 0.2% was posted.

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