Your weekly economic update from the team at FXD Capital
US economic growth rose slightly in Q2 to 6.5% on an annualised basis, which sound’s rather impressive, right? Consumption remains strong, but private investment is starting to flag, worryingly so, as the latter is generally a leading indicator for the former. Incredulously, the 6.5% print fell markedly short of expectations for an 8.5% expansion and only slightly exceeded Q1’s 6.3% level.
Perhaps we are becoming numb to such figures, with a growing acceptance that they are corrupted to an extent by incidents such as $1.9 trillion stimulus packages, where citizens received cheques in the post extolling them to spend the windfall immediately. I know American citizens – living overseas for years – who received such cheques, and as an economic boosting mechanism, the stimulus packages were both simultaneously scattergun and nuclear. Whether such effects can be sustained, appear dubious and explain why the Q2 print may be the swansong before normalcy resumes.
The US economy continues to display contrasting experiences. Four-figure signing on bonuses for fast food employees and a run on rental cars to quell the supply shortage of second-hand cars spring to mind of displays of exuberance. Yet, there are parts of the country decimated by wildfires, diversions in opinions about going back to work and generally an economy that seems to be split clearly between the haves and have nots.
Compared to the UK and Europe, the US will always be more resilient because it is an apex predator. Its economy is self-sufficient, evidenced by its blase attitude towards repealing 18-month bans on European and British travellers entering the country. It turns out the American tourism industry is doing just fine, unlike on the other side of the pond, where a clamour for guests may lead to repercussions in the autumn.
USTs continue to rally as investors run away from the reflation trade; the real yield on 10-year USTs is now -1.127%. However, despite US economic growth, an increasing unease about its sustainability leads to risk-off sentiment, compounded by Chinese intervention in its stock market, leading to a sell-off in large tech stocks.
The more prolonged inflation seeps through to prices and economies start wheezing, the more calls will rise that perhaps it’s stagflation that’s on the menu. Such a scenario remains unlikely, albeit plausible.
As expected, house prices cooled in July, with the Nationwide index falling to 10.5% from 13.4% previously. While a correction does not look obvious, prices will probably flatten off now. As any sentient being would have expected, the average stamp duty saving was £1,900 versus £24,500 in price appreciation. As we advance, what will be interesting is how the London market changes regarding whether footfall returns en-masse and how commuting norms change.
The budget is set for a delay until next year, which should lead to a very delicate autumn of speculation. All expectations point towards gloves-off style tax increases and spending cuts, all to be expected, but will come as a jolt to recent benevolence served through the furlough schemes and eat-out-to-help out experiences of the past year. Growth forecasts are increasingly optimistic, with the IMF predicting a 7% expansion for the year, with the nation passing pre-pandemic levels by the end of 2022
At the end of its recent two-day meeting, the Federal Open Market Committee announced that it “made” progress regarding its goals of full employment and 2% targeted inflation. Such a small word means so much, representing the first time an acknowledgement of permanency had been made regarding recovery conditions. The news was caveated with calls for “more ground to cover”, but the scene is set for a changing of the Quantitative Easing guard before the end of the year.
The Delta variant is now taking centre stage in the US and was noted in recent minutes, but it remains to be seen whether the US implements lockdowns again. To me, it seems too far gone down the track, and recent experiences in the UK may prove to be the inspiration for others to hang on and ride it all out.
Germany inflation reached its highest level since 2011, with clothing, food and recreation driving harmonised prices to 3.1% on the year. In addition, specific conditions in Germany like a cut in VAT, carbon taxes and a price basket shuffle are contributing to prices outpacing other eurozone members.
As a more manufacturing-heavy economy, supply chain issues and shortages have impacted Germany more profoundly than other nations. The pressure of this on producer prices will keep filtering into the German economy. However, one would expect that as rates rise, it will be the German banks that are last to cave in, as they remain well capitalised, strongly rated and favoured by foreign depositors.
All the best for the week ahead
Our weekly column is written by Alex Graham, Economic Advisor to FXD Capital. Originally a bank treasurer, Alex’s weekly roundup intends to provide a conversational, top-down view of what is going on in world macroeconomics and how it impacts business on the ground level.
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