Preliminary Q1 GDP -6.1%
13th May: Highlights
- Economy still 9% below pre-Covid level
- Inflation above expectations
- Leap in vaccination take-up to boost growth
2.1% expansion in March points to significant Q2 growth
This shows that the economy began to recover as soon as Boris Johnson announced his Roadmap to Freedom.
Companies across several sectors of the economy began to prepare for the reopening and Johnson has been able to keep the plan on track, thanks to the continued success of the rollout of vaccinations.
Looking forward, given that the retail sector opened in the second week of this quarter a significant reduction in the remaining differential between now and the pre-Covid level should be expected.
As of the end of March, the UK economy was 8.7% smaller than it was before the Pandemic hit. The pace of the recovery that has been seen it is possible that GDP will be back to that level by the end of Q3. That is well ahead of the most ambitious expectation even as late as last year.
In Europe, only Spain had worse growth figures than the UK and this makes the ongoing recovery even more remarkable.
The Bank of England estimates that the UK economy will grow by 7.25% in 2021 but that figure is now considered to be on the low side.
Once the full reopening takes place next month, the real test will begin of just how much reliance there has been on support and stimulus as items like the furlough scheme are gradually reduced.
Outgoing BoE Chief Economist Andrew Haldane who will leave after next month’s MPC still believes that the economy will survive perfectly well.
He was the first member to comment that the economy would fly once the restrictions were lifted and actually voted last week for the Bank’s bond purchases to be tapered by £50 billion.
Yesterday the pound ran up against selling pressure as the markets found buying interest at a two-year high was very thin indeed.
It fell to a low of 1.4050, closing at that level.
Powell needs to bring forward plans
Although the Fed continues to believe that the data is not as accurate as its own measure, Personal Consumption expenditures, it still has to make one comment on the opaque at which prices are rising. It will no longer suffice to make confident sounding sound bites.
As was seen yesterday, several Regional Fed Presidents were at pains to show confidence in both the FOMC Chairman and the policies he is presiding over.
CPI inflation grew by 0.9% month on month ex-food and fuel. This is a far more significant leap that had been expected.
While there are difficult times with wild swings being seen across the economy, to see such a miss by the NFP data followed by this, will start questions being asked.
While the surge in consumer prices is still believed to be temporary, the starting pistol has now been fired and the race to control price increases has begun.
Of course, there is pent-up demand rising almost exponentially as more States reduce or remove restrictions, but it is the supply side that is really struggling to cope and that is where support needs to be focussed.
There are still reasons being trotted out for the significantly lower data for news jobs.
In the UK in Winter, trains are often delayed by the wrong kind of snow, which is a feeble excuse.
That seems to have now migrated across the Atlantic with employers saying they are seeing the wrong kind of candidates. While that sounds ludicrous since these workers mostly had jobs, pre-Pandemic, support needs to be given to those areas of manufacturing and industry that have been slow to reopen.
We can expect supportive comments about the nature of the rise in inflation and the market may just swallow the pill, but if it continues through into further data releases the Fed will face almost impossible pressure to bite the bullet.
Yesterday, the dollar index rallied to a high 90.79 and closed close to that level. It is something of a knee-jerk, since the Fed is highly unlikely to raise rates between meetings.
Economy set for H2 lift-off
It may have been a complete fluke that the UK handled the Pandemic so well following the creation of vaccines, but that is only brought into sharp relief by the poor performance of the EU Commission.
Successive Presidents have shown themselves to be perfectly ok with dealing with a single event at a time. First, Jean Claude Juncker found Brexit too taxing at the time of continuing banking and financial crisis, while Ursula von der Leyen found Brexit and the Pandemic too much.
Had the EU accepted an agreement that was imperfect for both sides with the caveat that it could be revisited for further negotiation later she would have been able to deal with the supply of vaccinations and their distribution.
Now, finally there appears to be some light at the end of the tunnel. It is likely that there will be a major campaign to get Northern Europeans to visit the south on vacation this year in order to help with the redistribution of wealth but von der Leyen will need to charm Boris Johnson if he is to open up the way for UK citizens to visit the continent.
The EU sharply revised its full year forecast for growth yesterday as the rate of vaccinations has grown at a far higher rate that could have been imagined.
Concerns over another quarter in recession are beginning to fade as retail outlets begin to deal with pent-up demand.
Growth is expected to be at 4.3% this year and 4.4% next. While this will mean that the Eurozone will be the slowest major economy to reach pre-covid levels it will at least have a solid platform to deal with bank write offs and Government debt. The ECB has announced that it will continue to suspend rules over debt to GDP ratio for two more years.
The concerns over rising inflation will not have been helped by yesterday’s data in the U.S. First, it is likely that what happens in Washington is likely to cross the Atlantic and second a falling euro will exacerbate price rises.
Yesterday, the single currency fell to a low of 1.2065, closing at 1.2072.
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.”