Growth expected to be 2.5% in Q3
13th August: Highlights
- Easing of curbs leads to rebound in economy
- Jobless claims .data beginning to slow
- Sluggish industrial production casting a show over Eurozone economy
Pandemic number continue to improve prospects
However, challenges remain as the furlough scheme comes to an end next month. This will be the acid test for businesses that have been relying on Government support to remain afloat.
It remains to be seen how the knock-effect of the changes in working practices, like the increase in working from home, will affect the services sector.
Despite a strong second quarter following Q1’s fall of 1.8%, the economy remained 4.4% smaller than before the Pandemic started.
This means that it is likely to be Q1’22 before the economy returns to its pre-Covid level.
A further hindrance to the recovery would be tightening of monetary policy by the Bank of England. Governor Andrew Bailey has been at pains to insist that since he believes a continued rise in inflation will be temporary, ensuring the recovery is robust before any change in policy takes place is his top priority.
Any taper of the Bank’s Asset Purchase Scheme is unlikely to happen before October at the earliest, and it could even be delayed until the New Year if there are any bumps in the road.
With just one vote for a reduction in asset purchases at the latest rate setting meeting, there will need to be a significant increase in inflation in the coming months to encourage members to change their minds.
The Q2 data was a little below what had been expected and the Confederation of British Industry’s Chief Economist commented that they are seeing several supply bottlenecks emerging which could take the edge off a continued improvement in activity.
Raw materials are in short supply and there continues to be a global shortage of semiconductors. This issue has been exacerbated by continuing staff shortages.
The pound continues to be pressured by a strengthening dollar although for now, no new factors are emerging to push the Greenback through quite strong resistance levels.
Yesterday, Sterling fell to 1.3794, closing at 1.3809.
16.7 million of 22.7 million jobs recovered so far
The data for jobless claims remains similar to the data for job losses, which is being interpreted as meaning that those who continue to lose their jobs are not finding new positions as easily as theory were recently.
This could mean that the effect of the virus is being felt more in some areas than others and may mean that there will need to be a mass migration to less affected areas.
With the President’s infrastructure schemes not taking effect until the middle of next year the country’s recovery could still be blown off course.
The Federal Reserve Chairman has been very clear in comments over the past few months that the Central bank puts a robust recovery above any transitory increase in inflation.
As with the UK, the U.S. economy is seeing shortages of raw materials and is being significantly hammered by the global semiconductor shortage.
Despite the unemployment rate falling to 5.4% in July, it is still well above the rate that was seen prior to the Pandemic and of the 22 million jobs that were lost in the first few months of lockdown, only 16.7 million have been recovered.
While inflation fell in July, it is expected that it will plateau in August and/or September. This will leave the FOMC with a dilemma
Most commentators now see the October meeting being the one at which a taper of asset purchases will be announced, but any change in employment sentiment could see that delayed until November, although a delay until the New Year is deemed unlikely.
Since the most recent NFP data, the market has been in positive mode regarding the dollar, but the strength of resistance around the current level has surprised some traders. while any weakening of sentiment could push the dollar index back into its recent range.
Yesterday, the dollar index rose again to a high of 93.03, and it closed at that level.
French companies may force Frexit consideration
The timing of the trend is surprising given that the Presidential Election will take place next year and employment is sure to be a hot topic in the aftermath of the Coronavirus Pandemic.
Faced with a growing budget deficit and a close to unsustainable debt to GDP ratio, President macron is powerless to stop large industrial concerns closing factories in France and opening in countries like Poland and Romania.
While this may be a further example of Macron being a good European, it will not gain him any favours at home.
One of the major food producers Knorr, a subsidiary of the giant Unilever Group, announced that it is shutting down production in France and moving east.
Macron is being accused of putting his obsession with European Sovereignty above French jobs.
With the relationship with the EU sure to be close to the top of the public’s agenda as the election nears, such a policy could backfire seriously on the President.
The leader of one fringe Party that favours France following the UK out of the EU called the recent moves anti-French and criticized free competition rules, which provide a massive advantage to nations whose wages are traditionally lower than those in the more developed Western countries.
ECB President Christine Lagarde tried to calm growing German concerns over inflation yesterday by reiterating her view that rising inflation is going to be a temporary phenomenon. But with the bank unlikely to change its supportive policies for at least six months, she is going to face further criticism and a tough time convincing the more hawkish members of the Governing Council.
The euro continues to flirt with major support versus the dollar.
Yesterday, it fell to a low of 1.1723, closing at 1.1730.
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.”