UK recovery stuttering
17th September: Highlights
- UK recovered fastest in G20 in Q2
- Retail sales improve despite new car shortage
- Recovery happening faster than anticipated according to ECB President
Businesses struggling to find staff increases by 50%
The UK posted by far the fastest rate of recovery in G20 for Q2, growing at 4.8% in Q2 after a 1.6% contraction in Q1. The next fastest recovery was seen in Italy, which grew by 2.7%.
That rate of growth won’t be repeated in Q3, as the effect of the emergence from lockdown for several sectors of the economy will no longer be present.
The hospitality and tourism sectors saw rates of growth well above the average but the inability to attract staff, which has led to shortages as well as difficulties in the logistics sector, have seen the recovery stutter.
Rising prices, particularly of raw materials, continue to add to inflationary pressure.
One area that bodes well for a continued recovery has been the seeming improvement in trade between the UK and EU post Brexit.
Some commentators are predicting that by the middle of next year, trade between the UK and EU will be well above the level it was at when the UK was a member of the Union.
Such a promising prediction comes on the back of UK exports recovering to above pre-Covid levels in June.
Trade remains an area where the global recovery is patchy. While there has been a degree of growth during Q2, the UK as a whole still remains below where it was at the end of 2019.
The employment and inflation data that has been released will attract the attention of the more hawkish members of the MPC when they meet next week, but it is still considered unlikely that any change will be made to the level of support being provided to the economy.
With the furlough scheme ending at the end of the month and the £20 a week boost to the Government’s catch-all Universal Credit benefit also coming to an end, the outlook remains shrouded in doubt.
Yesterday, the pound fell to a low of 1.3764 and closed at 1.3779 as the dollar rebounded from recent weakness.
Transitory nature of inflation coming under question.
Jeffrey Gundlach, who manages more than $130 billion in various funds, believes that there are signs developing that inflation is here to stay, at least for a while.
Gundlach believes that the level of inventories in the U.S. is very, very low, and this is not a signal that inflation is transitory.
Low inventories are a sign that raw materials and spare parts will remain scarce for some time, and that means rising prices for the consumer.
Powell still hasn’t retracted or at least amended his view that if the economy continues to grow at its current rate that he and his colleagues on the FOMC will be in a position to begin to taper support created by asset purchases by the end of the year.
Given the weaker than expected data that has been released since the Jackson Hole Symposium, there is a growing feeling that it will be January at least before the Fed feels sufficiently comfortable with the recovery to begin to reduce purchases.
That will make next week’s FOMC meeting highly significant. It seems a little like The Boy Who Cried Wolf, to label every FOMC as more important than the last but given the activity that has been seen since the start of September this time it may actually be true.
It is almost certain that there will be no action taken next week, and that will make the minutes that will be released on October 13th, that much more interesting as they will provide clues as to the thinking of various FOMC members and Regional Fed Presidents.
The dollar index began to rally again yesterday, following a few days when it had been under a little pressure.
It rose to a high of 92.96, and closed at 92.92
Lagarde sees 5% growth in 2021 and 4.6% next year
Christine Lagarde believes that the economy will grow at 5% this year and by 4.6% next. In here comments, she said that she expects the economy to grow at close to trend in 2023 and that will have taken longer term investors by surprise.
It has been acknowledged by the ECB that in the past when there have been issues like the Financial Crisis that the Union hasn’t learnt from its mistakes.
History teaches us that those who do not learn from their past mistakes are likely to repeat them.
Given the marginally more hawkish outcome of the latest ECB meeting, there could be more repetition further down the track.
Lagarde believes that the Eurozone economy will have recovered to pre-Covid levels before the end of the year. That would have been unthinkable during the first and possibly even the second quarters.
While data that has been released so far since June has been encouraging, it would be a major surprise if the Eurozone reaches that level that quickly.
There have been several comments recently from the more dovish Central bank Governors in the region commenting that the reduction of asset purchases will be a slow and gradual process.
It remains to be seen just how far the hawks will allow the Governing Council to travel down that path before the talk about budget deficit and debt to GDP ratios begins.
Greece, which has been the sick man of the Eurozone, as far as inflation is concerned, saw a chink of light. Since exiting its own recovery plan, one in three Greeks under age 24 were unemployed. T
The Greek Prime Minister announced today, (without giving any numbers) that that figure has declined significantly. The euro also suffered at the hands of a stronger dollar yesterday. It fell to a low of 1.1750, closing at 1.1756. That was its lowest close since August 27th.
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.”