13 August 2020: Sunak unperturbed by GDP

Sunak unperturbed by GDP

13th August: Highlights

  • UK recession brings media frenzy
  • Covid still No.1 risk for economy
  • Growth in industrial production slows in June

Services led economy shrinks by 20%

It seemed to come as something of a shock to the UK media that the UK economy contracted by 20.4% in the period from April to June. Since the UK economy is 80% driven by services it is fairly obvious that having slammed on the brakes as hard as was necessary to curb the spread of Covid-19, the result would be spectacular.

Rishi Sunak, the Chancellor, commented yesterday that he expected that the recession which the UK entered having posted two quarters of economic contraction will be brief but echoing the words of his boss he also believes the road back could be arduous.

When asked about an increase in the period of negotiation over Brexit, Sunak was quick to say that he didn’t see the need. Whether this is a case of getting all the bad news out at once or more the fact that the UK needs to get on with standing alone sooner rather than later so it should get on with it, is hard to say.

The biggest ever contraction in a single quarter was followed by month on month growth of 8.7% which led analysts and economists to predict growth of 15% QoQ in Q3. Unless there is a second spike or another imponderable comes into play, it is almost certain that the first recession in 11 years will also be for the shortest possible period.

The pound barely noticed the GDP data, which contrasted with the, shock horror, written and spoken media reaction. It fell to a low of 1.3005 and closed slightly lower on the day at 1.3033.

The most significant issue facing the UK is the continuing rise in unemployment. With estimates putting the number of redundancies in the pipeline at 140k, that could be a major concern for the levels of activity expected going forward.

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Economic recovery to remain inconsistent

By just about every measure available, the U.S. economic recovery will be erratic and based upon the nation’s ability as a whole to get the pandemic finally under control.

While it can be claimed that several nations are struggling with the same issue, it is the U.S. that leads the way in most statistics. This assumption really has a hidden meaning and that is that the need to find a usable vaccine is more desperately needed in the U.S. than in almost every other country.

Yesterday, it was reported that the Chief Economic Advisor claimed that the current negotiations with China are fine.

That may or not have been some kind of euphemism since the most recent independent view seems to contradict that opinion. Several issues have sprung up which means that phase two of the agreement is nowhere near to being finalized on schedule.

With economic activity having trailed off somewhat in July having seen a storing rebound in May and June, the protracted negotiations over social welfare and unemployment support which come as something of an anathema to U.S. administrators need to be concluded to see any meaningful growth going forward.

With the unemployment rate still expected to be at or very close to 10% by year end providing a degree of extra support into at least Q1 ‘21 is becoming necessary.

The dollar index is struggling for direction as traders try to get a handle on how the underlying economy is really faring. While capital markets still rise, it is how the self-employed in Arkansas or the family owned business in Wisconsin is faring that really drives growth.

The index rose to a high of 93.90 but fell back to close lower on the day at 93.43. Looking at the charts, it does seem as though a fairly strong bottom is being created but it is hard to say when any recovery will come.

Patchy recovery illustrates second wave concerns

Industrial production across the entire region continues to fall at a significant rate.

Non-seasonally adjusted, industrial production fell by 12.3% in June. This was an improvement over the previous data but still shows that activity is taking longer than expected to recover and any thoughts of a V-shaped recovery have vanished.

With the ECB at the limit of its powers and fiscal support slowly becoming available, the EU is unlikely to see any significant signs that the recovery is underway until well into next year.

The Eurozone economy is an unwieldy beast. It is almost certainly more diverse than the U.S. It also suffers from a perception that every member of the community may not be pulling in the same direction. A view that the benefits of a single purpose are lost on some creates a fragmented overall view.

As the EU matures in its current format, free movement still is the single most important measure. The fact remains that workers are still considered immigrants as they migrate from, say, Hungary to Germany or Italy to France.

The language barrier remains and while in the U.S. a national identity prevails and someone moving from Texas to New Mexico is still American such a social model doesn’t yet exist in the EU as national characteristics remain.

These are the issues that continue to dog the development of a model that will allow the EU to appear as one in the global economy and something that also hampers activity.

The Euro is now well and truly into its August holiday lull. Despite the fears of a second wave, Europeans are still making the most of the vacation season. The single currency continues to trade sideways with a marginal upwards bias. Yesterday, it rose to a high of 1.1816 and closed at 1.1784.

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.”