15 January 2021: 3% fall in GDP in Q1 forecast

3% fall in GDP in Q1 forecast

15th January: Highlights

  • Analysts believe that recovery to pre-Covid levels will take two years
  • Powell speaks of long and ultimately successful road
  • Germany will avoid double dip as its economy shrinks by 5% in 2020

Sunak may need to add further assistance

Despite the apparent success so far of the rollout of the vaccination programme across the entire country with more than three million people so far inoculated against the virus, the underlying damage to the economy is worsening.

Chancellor Rishi Sunak is expected to consider an extension to what is already a programme of support that has been in place for more than a year as it is.

While it was expected that he would by now be looking at ways to repay some of the borrowing that is running at a peacetime high, he is still on the frontline putting out fires.

The expectation remains that the vaccine will ultimately be the panacea that cures the country but economically the effect of the current lockdown, without even considering Brexit will take a considerable time to recover from.

A panel of analysts when asked their view on how long it will be before the economy is back to the pre-Covid level, the average response was two years’ time. Some even believe that it could take appreciably longer than that, possibly the entire length of this Parliament.

Estimates put the hit to the economy from the current lockdown at 3% in this quarter. With flash estimates for Q4 expected early next month a recession appears unavoidable, although the brief lowering of restrictions in October may have provided a degree of impetus before lockdown 2 took hold.

The government’s propensity for over-promising and under-delivering is again under severe scrutiny. The promise to inoculate the four most vulnerable groups by mid-February is being questioned together with all over fifties by mid-April.

The UK has had a quiet week data wise with speculation engendered by speeches by MPC members concerning negative interest rates a driver for Sterling.

The pound is struggling to make fresh highs above 1.37 and traders patience is now being tested. Yesterday it fell to a low of 1.3616 having briefly poked its head above 1.37, reaching 1.3709 and closing at 1.3682.

Next week will see the release of inflation and house price data as well as retail sales and consumer confidence. These are likely to be more significant for the currency with an uptick in volatility likely.

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Rates to stay low as long and prices remain benign

Fed Chairman Jerome Powell in an interview yesterday appeared relaxed about the growing clamour that is taking place about a potential rise in inflation on the horizon.

When the time comes to raise rates, we will not hesitate to do so but that time will not be in the foreseeable future.

There will need to be substantial positive progress for the Fed to act and the FOMC is currently more interested in driving and supporting efforts to combat the negative effects of the Pandemic on the economy.

Powell remains less concerned about inflation than he is about employment. That seems to be a realistic belief considering that new weekly jobless claims came close to reaching the one million mark again in the latest period.

The exact number was 965k from 784k the previous week. Continuing claims also rose, from 5072k to 5271k. This significant increase will concern the incoming administration. President-elect Biden introduced a support and stimulus Bill yesterday valued at approximately $1.9 trillion.

That is an area where inflation is rising! Over the last couple of decades, the numbers have grown from millions to billions and now trillions.

With the outgoing administration having mailed out cheques for $600 to all those eligible around Christmas Time, in Bidens plan the next ones will be for $2,000.

While there will be scrutiny of the numbers, the fact that the Democrats now control both Houses in Congress, the passing of the Bill should be reasonably smooth.

With President Trump’s impeachment trial set to take place in the Senate with a two thirds majority needed for him to be found guilty, the curtain will fall next week on one of the most divisive and controversial Presidencies in American history.

While every part of the country’s ills cannot be solved by this event, there is already a sense of calm slowly descending.

Yesterday, the dollar index lost a little of its recent sheen but remains above the 90 level, possibly building a solid base. It fell to a low of 90.07 but recovered marginally to close at 90.23.

Decade of growth hits the buffers

A decade of growth following the financial crisis which threatened the very existence of the Eurozone, ended abruptly as the region saw a major contraction across the board last year. Overall, the economy appears to climb the stairs up but come down via the elevator!

The German economy fell by an estimated 5% with other nations doing even worse. France contracting by 9.4%, Italy by 9.9%, and Spain by 12.4%. To provide a little context, in 2009, the height of the financial crisis, the German economy shrank by 5.7%

Official Q4 data for Germany will be released in two weeks.

The estimate for the recovery in Germany is for 4.4% growth this year but it is difficult to be certain given that any manufacturing recovery will considerably outstrip services.

There is likely to be significant pent-up demand once the lockdowns start to recede. The savings rate grew by 16.4% last year so the funds will definitely be available.

The rollout of the vaccines in Europe is best described as sluggish as supply and logistical issues remain. This will add to the length of time before the entire economy can return to something approaching normal.

This week has seen a fairly supportive set of figures for EU industrial production which is still in positive territory (just). As already mentioned, Services output is unlikely to be positive.

Next week will see the release of the influential ZEW confidence survey for both Germany and the entire EU, as well as an ECB meeting and press conference.

Friday will see PMI data for both services and manufacturing as well as a composite figure released, so any ramp up in volatility will likely be in the second half of the week.

Yesterday, the euro gained marginally on the dollar, reaching a high of 1.2178 having earlier fallen to 1.2111. It closed at 1.2164.

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.”