07 April 2021: IMF sees strong bounce

IMF sees strong bounce

7th April: Highlights

  • A different type of recovery beckons
  • Recovery patchy but not necessarily regional
  • IMF sees Eurozone trailing the U.S

UK to outperform the Eurozone and U.S. in 2022?

The UK’s recovery from the Covid-19 Pandemic is not only going to be far stronger than analysts predicted, but it will be a different kind of recovery.

Data released by the Office for National Statistics showed that in Q2 of last year, the first quarter where the economy was fully locked down, the economy shrunk by 19.5%. That is marginally worse than previously reported.

However, in the third and fourth quarters the recovery was a little stronger than first believed. In Q3, the rebound saw the economy grow by 16.9% and in Q4 1.3%.

In the context any previous downturn, not only has the contraction and recovery been immediate, but there has been no recession when judged by the classic definition of two consecutive quarters of negative growth.

One further unique facet of the current economic situation is that the economy hit the emergency brake, shutting down almost overnight. The end of the first lockdown then brought on a quarter of full throttle before the subsequent lockdowns.

Official estimates are now for the UK to emerge from the current lockdown taking full advantage of the stimulus and support provided by the Treasury and Central bank.

The economy, rather than seeing gradual changes in working practices brought about by the advent of, for example, online shopping and working from home has seen ten years of change condensed into a single year.

The forced changes have meant that business has had to adapt on the hoof, with what are expected to be positive reactions to a new normal. It may sound harsh, but several businesses will fall by the wayside, no longer necessary or viable.

The Government being guided by data not dates, has managed the delivery of the vaccination programme better than anyone could have imagined. This coupled with the timing and depth of support means that the economy will be among the fastest growing over the next eighteen months, possibly outstripping the U.S., and outperforming the Eurozone.

This growing optimism is spilling over into currency strength which may see exports suffer in the short term while there is a period of adjustment, but the longer term, the positive effect on inflation, which is beginning to rise, will outweigh any negative effect.

Yesterday, the pound remained in its current range versus the dollar closing at 1.3825 as the market returned from the Easter weekend.

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Minutes to repeat confidence over inflation

The turnaround in the U.S. economy is as stark, possibly even more so, than that seen in the UK as the country has not only one through an economic upheaval but a political one as well.

The clear gamechanger in the U.S. has been the level of stimulus that the new Administration has been prepared to inject into the economy with its broad base, challenged by Republicans in Congress, providing financial support to individuals as well as anecdotal support to the economy.

The shining beacon of the recovery of the U.S. economy is the number of new jobs that have been created but that will be for nothing if the trend does not continue. With in excess of 900k new jobs being created in March, while it is doubtful that that number will be exceeded in April, data for other areas of the economy must follow suit.

The recovery is now fairly consistent across the entire country as the level of vaccinations being delivered remains high, but it is not consistent across all sectors.

A good example of this has been the disparity between new home sales, existing home sales and building permits. This will most likely even out as the recovery continues but for now the advantages to moving home have not fed through into construction.

The minutes of the latest meeting of the FOMC will be released later today.

While the Fed won’t indulge in any self-congratulation it can take pride in its part in the recovery. While the White House can say it’s stimulus package provided the jolt the economy desperately needed, the Fed has been laying the groundwork for the recovery for several months.

It now faces the possibly more urgent task of controlling inflation.

It has talked the talk, now it needs to walk the walk regarding its plans to control the surge due to the upturn in consumer activity. The latest FOMC minutes will be unlikely to deliver anything more than a considered view, but the next meeting, being held on 28/28 April may need to lay out its plans.

The dollar index is, for now, unable to break through resistance at 93.60 and has fallen back to challenge support at 92.20, That level has held so far but there may be a reaction to anything in the Fed minutes that displays the current dovish stance on monetary policy remaining in place for much longer. It fell to a low of 92.27 yesterday, closing within a pip of that level.

Activity to struggle to catch up as Pandemic lingers

The contrast in the performance of the Eurozone with both the UK and U.S. is becoming even more stark as the recovery begins in earnest.

The third wave of the Pandemic which has seen cases of Coronavirus grow almost exponentially is so far being contained on the mainland.

This means that as the UK is preparing to fully open its economy in around ten weeks’ time, the Eurozone is still firefighting with the consequent effect on both growth and competitiveness.

The unemployment rate in the Eurozone remained at 8.3% in February while investor confidence grew at a far stronger level that had been expected.

To put the confidence data in context, the growth came from a historically low level the previous month so anything less than a significant increase would have signalled disaster.

Employment is a difficult data stream to follow in the Eurozone since there is no way of easily correlating the figures with several states providing unreliable estimates. It is almost impossible to ascertain what the mean number should be even after twenty plus years of trying to compare like with like.

The fear is that as the region slowly emerges from the Pandemic later than expected, a second summer of tourism and hospitality will be lost with the subsequent effect on the economies of the southern states, which they can barely afford.

Several analysts report that the effect of the Pandemic on employment has so far been mild, but the unreliability of the data coupled with the number of businesses that may not reopen while their workers remain technically employed may see unemployment rise back towards 10%.

The eurozone is visibly clinging on as it strives to deliver the level of vaccinations that will allow it to ease restrictions. It needs to wait out the current wave of infections that have brought total lockdowns to several nations. Using the time during the lockdown to ensure that the vaccination programme is robust will allow the reopening of the economy that much sooner.

The euro is being driven by the price action of the dollar index. Yesterday, it rose to a high of 1.1875 and closed close to that level. The major resistance is around 1.1925 but it is unlikely to test that level in the short term.

Have a great day!
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.”