Written by Millan Chauhan.
Last week UK Gross domestic product (GDP) data was released for the second quarter of 2022 which saw the UK economy contract by 0.1 per cent having risen 0.7 per cent in the first quarter. In the month of June, UK GDP fell 0.6 per cent which did include two lost working days due to the two additional national holidays as part of the Queen’s platinum jubilee celebrations. Expectations for GDP in June were -1.3 per cent. Economists are now predicting that the UK will move into an official recession towards the end of the year, following the release of third quarter GDP data.
Whilst GDP data is useful for monitoring economic growth and consumer price inflation (CPI) is useful for assessing the level of inflation, they are lagging indicators and are a reflection on older patterns and behaviours. Whereas leading indicators such as the treasury yield curve have been a reliable predictor of previous economic downturns. In the US we have seen the yield curve invert, a phenomenon where short-term yields are higher than longer term yields. Under normal economic conditions, one should expect to yield a higher percentage in a longer term asset compared to a shorter term one. In the US, the difference between the 2-year treasury yield and the 10-year treasury yield is at its highest level in 20 years. We last saw this level of inversion back in the 2000s in the midst of the technology crash.
In the US, economic data was at the centre of attention as inflation data was released for the month of July which came in at 0.0 per cent, however this brought the annualised headline inflation rate in at 8.5%. Is this a sign that we are beginning to see inflation start to slow down?