Investors raise bets on UK recession, Powell signals more Fed hikes, and other economy stories to read this week

Investors are raising bets for a UK recession after the Bank of England (BoE) lifted interest rates more than expected this week.

The BoE hiked rates by half a percentage point to 5% in an effort to tame sticky inflation. Analysts now see further increases to 6% early next year, sparking a mortgage crisis and raising borrowing costs for government debt. The government is under increasing pressure to support those mortgage holders affected, The Times reports.

"Inflation is horrific," Juan Valenzuela, fixed-income portfolio manager at Artemis, who is buying two- and five-year gilts, told Reuters.

"Inevitably, the BoE will have to respond," with more rate increases, he added. These will "cause enough economic damage that the BoE will [then] have to cut [rates] quite aggressively."

Capital markets are also signalling a recession. The gilt yield curve is the most inverted since 2000, which means bondholders now want more compensation for lending for two years than for ten.

This increase in borrowing costs is also bad news for the UK government. Britain's public-sector net debt surpassed 100% of gross domestic product for the first time since 1961 in May as borrowing came in higher than expected.

Public-sector net debt, excluding that of state-controlled banks, hit £2.567 trillion ($3.28 trillion), equivalent to 100.1% of gross domestic product.

Further US interest rate increases are "a pretty good guess" if the economy continues in its current direction, Federal Reserve Chair Jerome Powell told lawmakers this week.

Powell said he would not characterize the Fed's decision last week to hold interest rates steady as a "pause", and noted that a majority of policymakers expect two more quarter-point rate increases by the end of the year.

While inflation is still way too high for the Fed's comfort, there are signs interest rate increases are feeding through to the real economy. The number of US citizens filing for state unemployment benefits continued at a 20-month high for the third week in a row, which could indicate a softening labour market.

Eurozone business growth virtually stalled this month. A widely watched business survey showed this week that HCOB's flash Composite Purchasing Managers' Index (PMI) for the bloc sank to a five-month low of 50.3 in June from May's 52.8.

China cut its key lending benchmarks on June 20 for the first time in 10 months in an effort to shore up a slowing economic recovery. The one-year loan prime rate (LPR) was lowered by 10 basis points to 3.55%, while the five-year LPR was cut by the same margin to 4.20%.

German house prices fell at a record rate in the first quarter as rising interest rates and weaker growth deterred buyers. The federal statistical office said its index of German residential property prices fell 6.8% in Q1 2022, the fastest annual rate drop since its records began in 2000, the Financial Times reports.

India's economy will grow 6.1% this fiscal year, shored up mainly by strong government spending, according to a Reuters poll of economists who also said consumption and exports will be the biggest drag.

Argentina's economy grew 1.3% year-on-year in the first quarter of 2023. That's the slowest increase since late 2020. The country's authorities are trying to stem an economic slowdown after one of its worst-ever droughts devastated harvests, draining foreign reserves and weighing down the already weak peso currency.

Turkey's central bank changed direction under its new governor Hafize Gaye Erkan, by lifting its key rate by 650 basis points to 15%. The bank said it would go further in a reversal of President Tayyip Erdogan's policy of monetary easing.

Two trials of universal basic income have been launched in England, where thirty people will each receive $2,046 a month for two years, no strings attached and people can work. The Welsh government had previously trialled a guaranteed income scheme for people leaving the state care system to ease what can be a difficult transition to independent life. Guaranteed income schemes have been tested in a number of countries. Research shows that recipients work more and have better mental health than those on unemployment benefits

Innovative, Africa-made fintech solutions are driving greater financial inclusion for those previously unbankable and excluded, like the poor, the young and women. Africa is falling behind on Universal Health Coverage (UHC) targets: around 43% of the population lacks access to basic healthcare and about 11 million people are driven into poverty annually as a result of having to pay for necessary healthcare. But the technology powering the fintech boom can transform health systems and reach those most excluded.

Europe has taken a major step towards regulating artificial intelligence (AI). EU lawmakers have agreed to changes in draft rules on AI, including a ban on the use of AI in biometric surveillance and a requirement for generative AI systems to disclose AI-generated content. The amendments to the draft rules are still subject to negotiations between EU lawmakers and EU countries but are expected to become law by the end of this year.