World Economic News Roundup: Issue 2, August 2018

An update on some of the most important news stories in the world economy last week.

* UK Growth Remains Modest Despite Interest Rate Rise

The Bank of England’s decision to raise interest rates from 0.5% to 0.75% on 2 August seemed to suggest prospects for the UK economy are positive. However, the latest growth figures don’t appear to corroborate this. Latest ONS figures say that the economy grew by 0.4% in 2Q 2018, double that of 1Q 2018 but still hardly remarkable.

In typical British fashion the ONS attributed the growth in the economy to the ‘good weather’ with retail sales holding up well, construction output rising 0.9% and the service sector rising 0.5%. More worryingly, industrial production declined 0.8% over the quarter contributing to a widening of the UK’s trade gap.

* US-China Trade War To Move To Another Level ?

The US-China trade war has been ongoing since this spring – we offered our thoughts on how it could affect your investments back in April. Ten percent tariffs have directly affected trade in products such as steel and aluminium and food products including soya and pork. In the process, many other countries worldwide have been drawn into the war and Donald Trump recently announced that the tariffs could be more than doubled to 25%, with China threatening to respond.

The next developments could, according to analysts S&P Global Ratings, see the trade in services drawn into the war, as China has limited scope to retaliate with tariffs on US goods exports. However, unlike with goods the US has a considerable services surplus with China and such a step could see US-China (and potentially world) trade in financial services, healthcare, technology and investment affected.

* US Implements Sanctions On Iran, Russia

Following the decision of the US that Iran is in breach of its obligations under the 2015 Iran Nuclear Deal the US has introduced a range of sanctions against Iran immediately. These sanctions are mainly financial and administrative and it is likely that further measures planned to follow in November relating to Iran’s oil exports will have much more impact.

In a separate move the US also introduced sanctions against Russia as a result of its alleged use of chemical weapons in Salisbury, UK, earlier this summer. These initially impact exports of some technology products, but could be widened in 90 days if Russia fails to pledge that it is no longer using chemical or biological weapons. Some commentators suggest the US was reluctant to introduce these sanctions but it was legally required to once it had determined Russia was involved.

* Prospects For World Oil Prices

After reaching a four year high last month prices have been declining slowly since. However, while oil prices are notoriously unpredictable it seems that they will prove to be especially unpredictable over the next few months. Factors which could see a rise include sanctions on Iran, reduced production in Venezuela and Libya amidst a general upward trend in world oil demand. On the downside, prices could be tempered by the impact US tariffs are having on the Chinese (and potentially world) economy, plus a likely increase in production by Saudi Arabia to gain some market share from Iran.

In spring 2018 Barclays suggested oil prices could drop significantly towards the end of 2018, but it has recently raised its forecasts to suggest Brent Crude will average £71 per barrel next year.

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