14 May 2021: Haldane voices longer term concern

Haldane voices longer term concern

14th May: Highlights

  • Project Fear no longer a concern for Johnson
  • Jobless claims continue to fall
  • Borrowing concerns to limit pace of recovery

Pace of growth cannot be maintained

The market now fully believes in the UK’s recovery from the Pandemic and the almost total reopening of the economy next month will accelerate the process.

It remains to be seen just how long the headlong pace will be maintained and the longer-term issues that will need to be addressed as the removal of stimulus packages leave the economy exposed.

The Bank of England remains confident that although employment will take a hit as businesses that have solely relied on furlough payments to keep staff employed suffer or fail, the anecdotal evidence from the latest growth figures shows that businesses began gearing up for the reopening almost as soon as the Prime Minister announced his plans.

As the public regains their socialising and spending habits, it will be the consumer that is the main driver behind a sustainable recovery.

As the global economy becomes more intertwined whether deliberately, or the fact that it has become split between manufacturers and consumers, it will face common threats.

As the coronavirus Pandemic recedes, which may not be anywhere near as soon as imagined, inflation will make a return, With the UK set for record growth this year, consumers encouraged by the saving that have been made during the lockdowns and demand outstripping supply, signs of overheating could well force the Bank of England into action.

The timing of such a move will be critical as a hike in interest rates that coincides with the withdrawal of stimulus could see the economy quickly erase all the gains seen as purchasing power falls and the cost of borrowing rises.

The housing market has been buoyant as those looking to move or trade up, have been encouraged by the Government’s stamp duty holiday. A rise in rates that coincides with the removal of stimulus could see the market collapse with the knock-on effect of the return of negative equity together with consequences for the building trade and other ancillary businesses.

For now, though the future continues to look bright, and the pound is beginning to react to the prospects for the economy despite the shock to the market from recent U.S. data.

Yesterday it performed a shallow correction to its recent rise. It fell to a low of 1.4005 but quickly recovered to close unchanged on the day at 1.4051.

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Producer prices point to even higher inflation

With hindsight, it was fairly clear that the Federal Reserve, that would have had access to inflation data long before the market, made every effort to prepare the investors for what was to come.

While damage limitation is too strong a description for the number of Regional Fed Presidents who made comments about transitory inflation, supply chain bottlenecks and systemic but temporary issues in the employment market, their words should have been taken as defence mechanisms.

The inflation data that was released earlier in the week brought the concerns facing the U.S. economy into sharp relief. While talk of overheating was looked upon as an abstract, almost theoretical issue, the problem suddenly arrived on Jerome Powell’s doorstep with the market looking for a response to ensure that its confidence remains high.

It is unlikely that the Fed will take any action with Fed officials calling for renewed resolve to see the economy through a bump in the road.

There has already been highly premature talk of whether Jerome Powell should be nominated for a second term. Investors have a very short memory. This can of course happen when it is looking for someone to blame for a lightening of their wallets.

Powell is obviously the figurehead and voice of the Central Bank, but he is backed by a team that subscribes 100% to the path of monetary policy that the country has embarked upon.

When studying the actions taken both by the Fed and the Treasury, no one has hidden the fact that pumping huge sums directly into the economy would bring inflation. This was never a question. Concerns that the Fed was adopting a laissez-faire or wait and see attitude are also wide of the mark.

The truth is that in such unpredictable times it was considered better to be reassuring than make promises.

Now is the time for action with the dollar having made what looks like a bottom for the current cycle. Whether by demand or not, a weaker dollar has helped exports and contributed to inflation although only by a marginal amount.

The dollar index ran into resistance at 90.91 yesterday but has managed to retain the gains made over the week, closing at 90.72.

Banks too suffer from bad loans until tourism and hospitality reopen

Outside of the data emanating from Germany, the Eurozone economy remains in a sorry state with predictions made regarding this year’s overall GDP figures finding very little to commend them.

There has been a considerable fanfare over the improving confidence figures, but hard data is not yet supporting that confidence.

Spain is a classic example. There is a confidence that the reopening of the tourism and hospitality sectors will see a rosy future arrive, but yesterday, the Bank of Spain warned that the economy may not see any improvement this year.

With the country placed in the red zone by the UK Government meaning that when travellers from the UK make their plans to travel this year, the millions who normally choose Spain will be looking elsewhere.

It is also very likely that staycations will be the order of the day for affluent Northern Europeans who often choose Spain as their destination of choice.

There has been something of an improvement in the retail sector across the entire Union with sales rising by 2.1% from a year ago. However, the data is often skewed by significant improvements in some areas that mask continued issues in others.

While the estimate for full year GDP has been increased to 4.3%, that is up 0.5% from February. Most of that is due to improvements in other economies that are beginning to suck in goods from the EU, primarily Germany.

Bank of Greece Governor Yannis Stournaras spoke yesterday about the fears of overheating and rising inflation across the Union.

He commented that given the manner of stimulus that had been provided, the Eurozone, while seeing an increase in inflation due mainly to the release of pent-up demand, is unlikely to suffer the signs of overheating currently being seen in the U.S.

The Euro has been the most significantly affected major currency from the turnaround in the fortunes of the dollar.

Yesterday, it fell to a low of 1.2051, but recovered a little to close at 1.2081.

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.”