UK growth to confound experts
6th April: Highlights
- UK on track to continue reopening
- U.S. follows strong jobs data with record activity data
- Euro set to test long term lows
Reopening on schedule as PM confirms dates
The success of the vaccination programme means that the UK will confound the forecasts made by both the IMF and OECD that the economy would struggle to reach its pre-covid level this year.
The area of the economy that will continue to struggle is foreign travel with tour operators and airlines demanding clarity. The traffic light system, where destinations are rated versus their current level of infections works well in practice, but the industry is demanding more notice of changes, particularly when a country is in danger of seeing restrictions put in place.
The restrictions placed upon arrivals in the UK will remain unchanged for those from amber and green countries, but those from countries ranked as green will no longer be required to self-isolate at their own expense although negative test results will still be required.
The lifting of restrictions will take place next Monday and it is expected that there will be a significant rise in activity confidence and spending as the country emerges, hopefully for the last time from full lockdown measures.
The economy is expected to reach its pre-covid level of GDP growth by the start of the fourth quarter, but it remains to be seen how resilient growth will be once the initial surge to satisfy pent-up demand.
The coming months will be the acid test for the retail sector, particularly bricks and mortar shops. Two of the largest chains, Debenhams and John Lewis will bring significant change to the High Street. John Lewis has announced that not all their stores will reopen while Debenhams is set to disappear entirely.
The knock -on effect of these changes together with changes to working practices could be devastating for support service businesses. However, until the reopening has taken place it will be impossible to gauge the full effect.
The pound has had a mixed time over the Easter holiday. Yesterday, it reached a high of 1.3915, closing at 1.3901 as support for the economic recovery grew.
Record PMI fails to ignite dollar rally
In several quarters, the fall was attributed by a rise in risk appetite but the differing pace at which G7 nations are emerging from their own lockdown measures with others having to re-enter lockdowns, does not make for a more positive attitude to risk.
The dollar remains well supported at lower levels and may well be heading for another break to the upside following a very strong employment report where in excess of 900k new jobs were added followed by record high levels of activity as seen in the release of PMI data yesterday.
Services output rose to 63.7 from 55.3 while the composite data from manufacturing and services together saw a rise to 59.7.
With all areas of the economy now well into positive territory, concerns about the Fed’s relatively sanguine approach will continue.
Tomorrow will see the release of the minutes from then latest FOMC meeting. While there is unlikely to be any major shock, just how Regional Fed. Presidents see inflation in their regions will make for interesting reading.
The latest predictions still see a rise in official interest rates not taking place until 2024 but there will be continued speculation about that date being brought forward until Jerome Powell is able to quell concerns with more than simply words about the Fed being on top of the situation.
So far Powell has given no indication that he is anything other than completely in control, but should he be proved wrong in any way, that confidence could ebb away quickly.
The dollar index has seen a correction following the employment data.
Yesterday, it fell to a low of 92.54, closing at 94.59. Support lies between 94.50 and 94.20 and provided that holds, the next move is likely to test the resistance at 94.60.
Q2 unlikely to be a lot better than Q1
The economy is going to struggle to see any growth whatsoever in Q2 although there may be pockets where the recovery begins before the beginning of Q3.
However, even that will be detrimental for investment as it will signal the possibility of a split in the Union between the haves and have nots.
There are already questions being asked about a reduction in the level of support being given by the ECB with its effectiveness being hardly noticeable.
It would be a brave man who could see the current level of activity in the Eurozone as an opportunity to act.
The economy will recover, of course it will. If the region has built any kind of track record over the past 20+ years of its existence it is in its ability to pull back from the brink. It is a case of when, not if.
The issue going forward may be seen in the dearth of those with the skill and/or personality to take the lead.
The EU Commission has a growing reputation for incompetence that has been amply demonstrated by its inability to drive forward the vaccination programme that is at the forefront of people’s minds.
At the ECB Christine Lagarde is a diplomat brought in to develop a more joined up Federal Union, driving it towards a more coherent range of fiscal policies.
Unfortunately, she has been expected to perform a series of firefighting tasks for which she is not qualified.
While Italy is a shining light of all that currently ails the EU, the level of confidence in Prime Minister Mario Draghi means that Italians can see a light at the end of the tunnel no matter how far in the distance it may be.
That light may be the signal that Italy may thrive outside the EU and in Draghi they have a PM who is prepared to make the tough decisions.
The euro had a good day yesterday as the dollar corrected. It rose to a high of 1.1819, closing at 1.1813.
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”