Stock Take

Households are all too familiar with the challenge of paying the bills in the current climate. After last week’s further hike in UK interest rates, that challenge will become even greater for some. But when the US government is unable to pay its bills, the problems truly begin.

In a continuation of the power struggle between the two parties, President Joe Biden last week piled the pressure on Republican lawmakers to swiftly raise the country’s $31.4 trillion debt ceiling or risk plunging the US economy into a recession. Although the US has never defaulted on its debt, the US Treasury Department warned that the government could run out of money as early as 1 June. A debt limit meeting scheduled for Friday was postponed, but both sides agreed to meet early this week.

The debt ceiling impasse cast a shadow over an otherwise relatively stable week in the market for risk assets following last week’s turmoil led by US banks.

“Rather than a sense of security, we think the state of play in markets expresses the degree of uncertainty among market participants grappling with risks on several fronts, while interpreting late cycle economic data,” suggested Mark Dowding of BlueBay Asset Management. “In general, we wouldn’t be surprised if volatility picks up in the months ahead, so being patient remains the stance best warranted.”

The battle against inflation is one of those risks, and as a sign that the Federal Reserve’s cycle of interest rate hikes is starting to yield results, data released on Wednesday showed that US consumer price inflation (CPI) dropped to an annual rate of 4.9%, the lowest since April 2021.

Further signs of easing inflation pressures were seen as US producer prices recorded their smallest annual increase in over two years. Meanwhile, weekly claims for unemployment benefits reached an 18-month high, indicating cracks in the US labour market and potentially giving the Federal Reserve room to pause interest rate hikes next month.

Signs of weakening inflation provided a midweek lift for US markets, but investors in the UK and Europe didn’t share the same enthusiasm, as they were aware of the more significant inflation problem on their side of the Atlantic.

The fragility of the UK economy was underlined by confirmation that gross domestic product (GDP) grew by just 0.1% in the first three months of the year and fell in March due to poor car sales and retail performance. There are concerns that the second quarter could also see a decline, especially with the additional bank holiday, although forecasters expect growth to start climbing again in the second half of the year.

The news followed the Bank of England’s (BoE) confirming a 0.25% increase in the base rate, taking it to 4.5% and the highest level since October 2008. In its optimistic announcement, the BoE predicted that the UK would avoid a recession, forecasting a 0.25% growth in the economy in 2023. This is an improvement on its earlier prediction of a 0.5% contraction.

The BoE now expects inflation to remain above 2% until the first quarter of 2025. However, as observed by Schroders’ Senior European Economist Azad Zangana, markets have recently been ignoring the BoE’s guidance due to its poor forecasts.

“We think the BoE is close to ending its interest rate hikes, but we may have one more rate rise next month,” said Zangana. “Inflation and labour market data in coming weeks will be important determinants. If hiring remains firm, wages continue to accelerate and there is a smaller fall in inflation than expected, then the Bank may need to tighten further.”

Asian markets were subdued by concerns that China’s economic recovery may be losing momentum, contributing to fears of a global slowdown. April saw a sharp fall in new bank loans, while consumer prices rose at their slowest pace in over two years, with a 0.1% year-on-year increase compared to a gain of 0.9% in March.

The announcement followed news that China’s imports contracted sharply in April, while exports rose at a slower pace, indicating weak domestic demand and the challenges posed by mounting recession risks for many of the country’s key trading partners. The data could increase pressure on the People’s Bank of China to reduce interest rates or inject more liquidity into the financial system.

Elsewhere in Asia, Japan experienced an unexpected decline in consumer spending in March, marking the fastest rate of decline in a year, while real wages continued to decrease for the twelfth consecutive month due to persistent inflation. Ahead of the G7 meeting scheduled to begin on 19 May, finance leaders from the world’s leading economies met in the Japanese city of Niigata. The debt ceiling stand-off in Washington and its threat to hopes of a soft landing for the global economy was high on the agenda. Stressing that the group must be ready to respond to any market repercussions, Japan’s central bank governor, Kazuo Ueda, stated, “I have faith US authorities will do their best to prevent it happening.”

Wealth Check

Spending money on private education is often seen as the best way to set your children up for future success. But if you thought choosing the right school and getting in was hard, the scale of the fees and the financial commitment required is enormous.

In the current economic climate, can you afford to go private?

The cost of private education has soared. Fees, which held steady during the pandemic, jumped by 5.1% in 2022, up from 4% in 2020-21 according to Schoolfeeschecker.1 The average cost per child is now £20,480 per year or £6,827 per term for day pupils, and £34,790 per year or £11,597 per term for boarders.1 Regional variations are significant as well. With rising inflation, energy costs and food prices, private schools have had little choice but to pass these increases on to parents.

This means that even if you earn a minimum of £100,000 per year, keeping up with rising school fees could be a struggle.

There are also ‘hidden’ costs to consider. Private education is a long-term commitment, so you need to factor in a 5% fee increase per year, as well as school trips, uniforms, and transportation if your children are day pupils. Everything that comes with a quality education, from cricket bats and ski trips to iPads and art materials. A good rule of thumb is to budget for an additional 10% per year.

Putting a child through the private education system is one of the most significant financial decisions you’ll ever make. While the fees may seem daunting, the key to making it happen is to start planning as early as possible. Many parents discuss public versus private education before having children and make the decision to start saving soon after the child is born.

By doing so, you’ll have up to ten years’ worth of savings and the benefit of compound interest to help fund their secondary school education.

It’s a lot of money to find, and every penny you save will need to work hard. Doing your homework and working with your financial adviser may be necessary for success.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.


1 Schoolfeeschecker, 2022

In The Picture

Providing your children with a tax-efficient financial boost early on can make a big difference over the long term. Discover some of your options in the video below.


The Last Word

The wind of change has been blowing. What we need to carefully and maturely ask ourselves is, is Thai society building a wall, or a wind turbine?

Pita Limjaroenrat speaking at a rally before Thailand’s election over the weekend, during which his progressive More Forward Party comfortably won the most votes.

BlueBay Asset Management and Schroders are fund managers for St. James’s Place.

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