Forecasts of growth in the UK are being revised up. The EY ITEM Club joined the 6% club last month, projecting growth of 6.8% this year. Bloomberg and JP Morgan revised growth forecasts to 7%. The latest estimate from Goldman Sachs suggests growth of 7.8% is possible, outpacing the USA in 2021.
Uncle Sam's shop grew at an annualized rate of 6.4% in the first quarter, according to the Bureau of Economic Affairs. The U.S. is on track to exceed the IMF forecasts made in April of 6.4% growth.
The Federal Reserve upgraded its view of the US economic recovery this week. Officials noted an improvement in the economy and offered a brighter picture in the short term. "Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened," the FOMC said.
Hardly surprising, US household incomes increased by 21% in April as Uncle Joe's stimulus checks dropped through the letterbox. The checks will help to fuel the economic revival. Savings rates leapt to 28% in March. Forced savings during the pandemic, suggest consumer spending is set to soar, supporting the recovery.
In Europe ...
In the EU, growth fell by -1.7% in the first quarter. Spain and Portugal were the most badly hit, with growth down by -4.3% and -5.4% respectively. The Italian economy was down by 1.4%. Just France and Lithuania were in growth territory. The French economy increased growth, up by 1.5%.
The IMF forecasts growth of 4.4% in the EU area this year following a setback of around 6.5% last year. More suspect is the 12.5% growth penciled in for India in the year. This suggests China will emerge as the fastest growing economy in the world this year at 8.4%.
Modern Monetary Policy ...
In the USA the Fed maintained the easy monetary stance. The Fedd funds rate remains within a target range of 0% and 0.25%. The asset purchase program is set to continue as $120 billion dollars per month. The Fed has set a high bar before the removal of any stimulus is imminent.
"Substantial further progress will have to be made toward the goals of full employment". Inflation may rise above target in the short term but this is a result of "transitory factors" which will drop out of the system by the end of the year. The Fed continues "Topping up the punch-bowl and handing out the spliffs." Base rates are expected to remain on hold into 2023.
So What of Inflation ...
In the UK house prices increased by 7.1% in April according to the latest data from Nationwide. Annual growth rates could hit ten per cent by June if prices are flat over the next new months. Inflation CPI remains subdued. Central bank stimulus continues. In the UK Money Supply M4 increased by 12.5%. In the US Money Supply M2 increased by 24%. Will excess liquidity and rising household spending lead to higher inflation? Perhaps!
Soon it will be time to worry about what happens next, after what happens next. For the moment forecasts of growth are just getting better and better ... enjoy the what happens next ...
That's all for this week .. we will be back with more next week. Our next Saturday Economist Live on Zoom is on Thursday 27th May at 9:00 am. Don't Miss that ... Fast moving, content rich and fun ... and slightly controversial ... of course ...
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Surfs Up ... Drop In ... Pull In ... Kick Out
The UK Economy is bouncing back from the coronavirus. Businesses are ready to shoot the curl! Surf's Up! It's time to Drop In, Pull In, Kick Out and enjoy the ride.
We expect the economy to grow by 6% this year and by 11% over the two year period. In nominal terms the economy will grow by over 20% over the next three years, providing strong support for businesses and jobs in the process.
Interest rates will remain on hold. Monetary policy will continue to be expansive. Fiscal policy will remain neutral. Even the so-called zombie companies will benefit from high levels of forbearance and debt erosion.
The latest flash PMI*data for April released this week demonstrated a strong revival in output growth in manufacturing and services. The composite output index increased to 60.0 from 56.4 in March. Both sectors are reporting stronger order books both at home and abroad. Manufacturers are reporting a growing willingness to spend, even among EU clients.
Business activity is expected to grow strongly in May and June, setting the scene for a bumper second quarter. There is good news for the job market. Businesses are recruiting and taking on staff at a rate not seen for over three and a half years. The latest jobs data for March reported a drop in the unemployment rate to 4.9%. We expect furlough numbers to drop significantly by the end of the second quarter.
There may be time to worry about inflation but not just yet. CPI inflation increased to just 0.7% in the month from 0.4% in February. Manufacturing prices ticked up in March. Input costs increased by 6%. Hardly surprising when the oil price Brent Crude averaged $63 dollars in the month, compared to $32 dollars last year. [Prices fell below $20 dollars in April 2020].
Retail sales bounced back. Year on year, sales increased by over 7%. DIY sales increased by 45%. Garden center sales increased by 34%. Online sales increased by 62% accounting for 35% of all transactions. Clothing sales on line increased by 80% accounting for 56% of all sales. Online sales at Zara increased by 95% in April. Primark reported record sales as stores reopened. Some stores closed early as capacity limits were stretched to the limit.
Even the borrowing figures turned out better than expected. Total borrowing hit £303 billion in the financial year, well below the OBR forecast of £355 billion in March and significantly below the near £400 billion spend expected in October last year. [The OBR forecasts included a £27 billion provision for loans under the government loan guarantee schemes. No provision is made in the latest ONS data.]
Tax receipts fell by 5% or £35 billion in the financial year. Special pandemic measures, including support for individuals and businesses, increased total spending by £203 billion. Total debt increased to £2.1 trillion, almost one third of which sits in the Bank of England coffers and of course is interest free. In the current financial year, the OBR are forecasting borrowing of £230 billion. Stronger growth and the end of lock down could push this much lower to around £150 billion.
With rates on hold, gilt yields suppressed, the Bank's "money for nothing gilts for free" policy ensures debt service is not a problem for the Treasury in the medium term. So get ready to shoot the curl, surfs up, enjoy the ride ...
China's economy surged by 18.3% in the first quarter of the year. The growth rate was the highest recorded since records began. The year on year comparison was impacted by the near 7% drop in output in the first quarter of 2020, as Beijing reacted to the Covid pandemic with a shut down of large parts of the economy.
For the year as a whole, most analysts, including the IMF, are forecasting growth in China of 8.5%, compared to 6.5% in the US and perhaps 6% in the UK.
Chinese consumers have emerged from the pandemic even stronger than they were before. In the first quarter of the year, retail sales were up by 34% compared to a year earlier. Home sales were up by 95.5% in the first three months of the year.
New car registrations were up by 70% over the same period. 5.1 million vehicles were sold, broadly in line with the same period two years ago. Electric car sales quadrupled to over 400,000 units. The Chinese Passenger Car Association predicts sales of electric vehicles will hit the 2 million mark this year.
Daimler reported sales up by 60% in Q1. Nissan recorded growth of 70%. [Don't expect a march on Beijing any time soon from the fragile Biden alliance]. Industrial output increased 14% in March. Fixed Asset Investment increased by 26% in Q1.
China vaulted to the top spot in the world in terms of new semi conductor investment. Investment levels overhauled South Korea, Taiwan and Japan, as domestic manufacturers rushed to build capacity. Investment increased by 39% to $19 billion dollars US in 2020.
Imports surged in March as Beijing pushed manufacturers to expand the local supply base. Tax rebates, state subsidies were granted. Import duties were waived for ten years. The dragon's appetite for chips with everything will be met, despite the restrictions from Uncle Sam. ASML CEO Peter Wennink has warned, export controls on China will not only fail to halt the country's technological progress but hurt the US economy in the process.
This week the Biden administration committed to a withdrawal of US troops from Afghanistan. A recognition perhaps, of a war that cannot be won as the Russians and the British have demonstrated in the past. The time must come for the White House to admit, a trade war with China, cannot be won. Trump's trade policy has already provided more recent evidence of that ...
That's all for this week ... stay safe ... we will be back with more next week ... off to have a bark at Dogecoin and join the search for a garden gnome ... is the shortage because of Brexit? Ye it must be Brexit. Don't believe that Suez Canal Cabal ...
In the US, prospects for the year are improving. Economists believe the economy is on the edge of a major boom that could last into 2023. A period of supercharged growth is beginning. Expansion is manifest in surging consumer spending and increasing demand for skilled workers.
Jamie Dimon CEO of JP Morgan believes the boom could last well into 2023. "All the spending [from government and households] could extend well into 2023". The IMF has upgraded forecasts for the US economy to almost 6.5% this year. The Federal Reserve is forecasting growth of 6.5% slowing to 3.3% in the following year.
So what of the UK?
The IMF has upgraded forecasts to 5.3% this year and 5.1% next. Our own forecasts assume growth of 6% this year and 5.2% in 2022. Consumer spending is expected to surge as the route out of lock down is secured. Households have amassed significant savings, most of which will be remain on deposit or passed into pensions, housing and financial markets. Oh yes and some may even creep into crypto.
Our forecasts are for consumer spending to increase by 7.9% this year and by 7.4% in 2022. The sector analysis is listed below. Restaurants, hotels, domestic tourism and clothing are expected to be the major beneficiaries.
The latest IHS Markit/CIPS surveys confirmed the strength of recovery in manufacturing, services and construction. The manufacturing index moved to an all time high. Output, order books and employment all gathered momentum. Optimism about the year ahead improved further.
The recovery in construction output gained considerable momentum in March with a big rise in house building and commercial work. The output index increased to the highest levels since 2014. The services sector recorded a strong rebound in business activity. New orders and employment were up in the month. The service sector index rose to 56.3 in March. Manufacturing closed at 58.9, construction hit 61.7.
Car sales were up in March, house prices moved to an all time high according to the Halifax Building Society. High street stores are expected to bounce back as stores reopen. Hiring activity picked up at the fastest pace in almost six years as companies prepared for the end of lock down according to the latest KPMG/REC survey.
We expect the furlough numbers to fall significantly in this quarter, down from the 4.7 million in February towards the 2.5 million level experienced in September last year. As with the US, the UK will experience a surge in growth which could well last into 2023.
The surge in nominal growth could be over 20% over the three year period, providing a substantial platform for jobs and business in the medium term. Soon it will be time to worry about what happens next after the what happens next but not just yet.
The inflation hawks are circling, the bond vigilantes stand watch. For the moment, as we said last week, get ready for the post pandemic boom ... cheers to recovery ... long may it last ...
The IMF now sees a brighter outlook for the world economy. The Bank of England is feeling more optimistic about the UK. The Office For Budget Responsibility forecasts real growth of 11% over the next two years. In nominal terms the UK could grow by over 20% over the next three years, underpinning growth for jobs and business in the medium term.
Thanks to the success of the vaccination program, the pressures of the pandemic are easing, providing a stimulus to growth. Thanks to the approval of President Biden’s spending plan, the American and world economy will benefit from his $1.9 trillion fiscal boost.
In the UK, The Governor of the Bank of England is feeling more optimistic about the prospects for the year. Vaccination continues at pace. The slow down in the economy in the first quarter is better than expected. Restaurant bookings are increasing. Domestic holiday reservations are rising. Consumer confidence is on the rise. Business confidence in manufacturing and construction is particularly high.
Asked what sort of recovery the UK could expect, Andrew Bailey said "I am now more positive but with a large dose of caution". "We now see upside risks to our January forecast", with some chance the peak in unemployment, may be lower than expected.
Boris Johnson’s timetable for recovery, suggests the hospitality sector, could be in full recovery mode from the end of June. According to Andy Haldane Chief Economist, at the Bank of England. The UK economy is like "a coiled spring", set to release lots of financial energy.
“Consumer confidence will surge back, the economy will be firing on all cylinders. Success with the vaccination and the easing of lock down, will assist the process,” he said. British households have amassed an astonishing £180 billion of cash apparently. They will be ready to return to the restaurants and book a much needed holiday. They may even take a trip to the cinema.
Unemployment actually fell in February to 5%, a modest improvement in the jobs market. Latest data from HMRC confirms that 4.7 million were on furlough at the end of February. Over one million were in the accommodation and food sector.
The number of workers furloughed is expected to drop rapidly in the second quarter. In September last year, the total number had dropped to 2.5 million as growth returned. A big bounce back is expected in the leisure sector as pubs, restaurants and hotels reopen for business.
According to the latest IHS Markit/CIPS data, business activity across the UK increased in March. The rate of expansion was the fastest for months, The expansion was fueled by a rise in new orders, attributed to a bounce back ahead of easing lock down measures. Stronger consumer confidence and a surge in demand for residential property services also featured.
Business expectations for growth, surged to the highest since comparable data were first available in 2012. Employment rose for the first time since the pandemic struck, as firms expanded capacity to meet demand ...
Get ready for the post pandemic boom ...
In the US forecasts for growth are increasing. The Bank of America is forecasting growth of 6.5%. The BoA has become more convinced, consumers will get out and spend, as the $1400 dollar stimulus cheques drop through the letterbox.
Biden's $1.9 trillion spending plan has passed through Congress. Next up the $2 trillion dollar plus infrastructure plan. The President is building bridges across America. Let's hope he will start to build the bridges back to China some time soon.
The US March jobs figures reported an increase of 916,000 jobs. Over 30% were in the hospitality and leisure sector. Economists think the March jobs gains are just the beginning. US households had accumulated $2.4 trillion dollars of savings in February, up by $1 trillion from a year earlier and they are ready to spend.
According to the New York Times, about 35 percent of Americans plan to spend more on travel over the next 12 months, about 28 percent plan to spend more than usual at restaurants. And over all, close to 70 percent of adults plan to spend more than usual in at least one category.
“They have the money in the bank, they’re ready to spend it. What was holding them back was not having a comfort about being able to go out,” said Jay Bryson, chief economist for Wells Fargo. “We’re getting
into a critical mass of people feeling comfortable and beginning to go out again.”
Not all will be spending. More than half the survey respondents who expected to receive "checks" said they planned to save most of the money or pay down debt. One-third said they would use it for immediate needs like food or rent. Only 10 percent said they planned to spend most of the money on discretionary items.
A similar pattern of save and spend is expected in the UK. Households have accumulated savings of £180 billion, over £20 billion of which has been used to pay down credit card and other debt. Most savings will be held on deposit or placed into pensions. Some appears to be finding the way into bitcoin.
In the UK, we expect household spending to increase by 8% this year and 7.5% next. Holidays, hotels and restaurants will be the major beneficiaries. Of yes and wardrobes will have to be refreshed. Expect a big bounce back in clothing and footwear ... in the post pandemic mini boom ...
That's all for this week ... stay safe ... have a Great Easter break ... we will be back with more next week ...
"Get Out There and Spend" says Chancellor ...
Retail sales "bounced back" after a dismal start to the year, according to the headlines in The Times today. Sales increased by 2% in February compared to prior month.
Not much of a bounce back really. Sales were down by almost 4% compared to prior year. Exclude petrol and other fuels and overall sales, were down by just 1%.
The pattern of pandemic sales repeats. DIY and garden center sales were up by over 20%. Clothing and footwear sales were down by 50%. Alcohol sales were up by over 40% in the month. Food sales were up. The proportion of food sales online, increased to 12%, from just 5% last year.
Online sales, as a proportion of all retail sales, increased to a record 36%. The damage to conventional retail continues. Just 15% of rents due, were paid on the March quarter day, this month, placing additional pressure on property owners, bankers and other lenders.
In other news, the unemployment rate fell to 5%. Earnings increased to 4.8%. The Chancellor is urging people to "get out there and spend". "Go have fun and spend money". Shops are due to re-open on the 12th April. Rishi Sunak said, people should "do their bit" by spending savings they had built up during the lock down.
The Chancellor believes there is a lot of excess savings, which could be a stimulus to growth. The Office For Budget Responsibility said last month, that households have accumulated £180 billion in accumulated savings. Spend it all, and with VAT back at 20% that's a further £30 billion for the Treasury coffers.
In an effort to to help the recovery and increase costs for retail, shops would be allowed to open until 10:00 pm in the evening, said Robert Jenrick, the Communities Secretary. Time then, to pop into the pub, with no curfew in place. Just carry a vaccine passport and be prepared for a blood test. Scientists in SAGE are working on a breathalyser. Yes! Soon it will be necessary to "blow into the bag" before you can get a drink ...
Joe Biden held his first press conference this week. China featured. "I will save the world from an over mighty China" vowed the President of the United States.
Working with other democracies, Biden committed to ensure China does not achieve global domination during his presidency. He may even run for a second term, to hold things up, if necessary.
China is set to overtake the US, as the largest economy in the world by 2028 and double in size by 2035. It may take over 50 years to achieve parity in terms of GDP per capita. Even Joe Biden can't expect to hold onto office, until then.
"China has an overall goal to become the leading country in the world, the wealthiest country in the world and the most powerful country in the world. That's not going to happen on my watch, because the US is going to continue to grow and expand" said Biden. The President ducked questions on whether he would ease trade restrictions and lift tariffs as many businesses in the US request.
The United States is urging allies around the world to counter maritime aggression in the South China Seas. Anthony Blinken, Secretary of State pushed for action in meetings with the "Quad". The "Quad" is the security alliance including Australia, Japan and South Korea.
In the Philippines, concerns are rising about the large Chinese fishing fleet, floating around the Spratly Islands. Trawler men, trained to fish and fight, are on board. Manila is to step up "sovereignty patrols". China announced further exercises in the South China Seas in response. Chinese warplanes carried out the biggest incursion yet into Taiwan air space. North Korea launched a few short range ballistic missiles tests to assist with raising tensions in the area.
Sanctions flow thick and fast from the US and the EU to China. The Middle Kingdom is always swift to respond. The UK follows the Western line. The President spoke with the Prime Minister. Ways to rival China's international Belt and Road initiative discussed.
The response from Number 10 must have been pretty lukewarm. No money for international infrastructure on offer. "We are in the process of slashing foreign aid, wrestling with our leveling up agenda and struggling to get a high speed rail link to Birmingham at the moment. In any case I have my mind set on a bridge to Northern Ireland. We are using the old blue print for a flower bridge, across the Thames to save money."
The President is walking the line to suit a domestic political agenda. No cold war in prospect. The first meetings in Alaska were frigid enough. The tensions are rising. Time soon to dial down the rhetoric. Beijing is making it clear, two circulations are available for growth. Applying a tourniquet to the Western limb would not be a severe impairment to China's growth ambitions ...
"I am more optimistic" says Governor ...
No rise in base rates this week. The MPC voted unanimously to maintain Bank Rate at 0.1%. The target for government bond purchases was maintained at £875 billion. The corporate bond stock was on hold at £20 billion.
The total target stock of asset purchases remains at £895 billion. Just as well really. Total government debt increased to almost 98% of GDP. The quantum of solace hit £2.13 trillion. Not long before the Chancellor will have exhausted, his first trillion pound bank note.
The Governor is feeling more optimistic about the prospects for the year. The vaccination programme continues at pace. The slow down in the economy, in the first quarter, is better than expected. Restaurant bookings are increasing. Domestic holiday reservations are rising, (with prices to match). Consumer confidence is on the rise. Business confidence in manufacturing and construction is particularly high.
Asked what sort of recovery the UK could expect, Andrew Bailey said "I am now more positive but with a large dose of caution". "We now see upside risks to our January forecast", with some chance the peak in unemployment, may be lower than expected.
In January, the Bank were forecasting growth of 5% for the current year. An upward revision seems probable. 6% to 6.5% growth, seems possible this year. In the US and China, the revisions have already been made. The IMF forecasts of 5.5% world growth this year, already out of date.
UK gilt yields closed higher. Up by just two basis points in the week, at 0.84, the Governor commented "We have seen some increase in rates over the last month or so. My assessment so far, is this is consistent with the change in economic outlook".
Sterling closed lower at $1.3868. The test of the $1.40 level completed our eighteen month pattern. Uncle Sam's zloty is gaining favor. The siren's call of ten year bond yields, up nine points in the week, too much to resist.
In the US, the Fed held rates and maintained the asset purchase plan. The Fed is not yet ready to take away the punch bowl. Jerome Powell is topping up the punch bowl and handing out the spliffs ... check out today's update ...
In the US this week, the Federal Reserve held rates and vowed to maintain the momentum of the asset purchase plan. The Fed will continue to increase its holdings of Treasury Securities by $80 billion dollars per month. $40 billion remains the monthly budget for mortgage backed securities.
The "accommodating" stance of monetary policy will be maintained until "substantial further progress has been made towards the committee's maximum employment and price stability goals."
Last week the house approved Biden's $1.9 trillion spending plan. The White House is working on a further $2 trillion plan to follow, for infrastructure and business investment. The Fed is adding to a further $1.5 trillion to the asset purchase plan to help out. Forecasts for the US economy have been revised up. Growth of 6.5% is now expected for the year, compared to the 4.2% forecast in the December projections.
The forecasts for unemployment have been revised down, the forecasts for inflation have been revised up. Inflation is expected to rise above the 2% target to 2.4% in the short term. The Fed will "look through" any short term breach. Base rates are expected to be on hold into 2023. US ten year bond yields increased to 1.71%.
Over fifty years ago, the Chairman of the Federal Reserve, William McChesney said, the job of the central bank is to "take away the punch bowl just when the party gets going". For the moment, the Fed is topping up the punch bowl and handing out the spliffs.
Jerome Powell as Chairman of the Fed is creating the mother of all parties to ensure everyone is well inebriated before the mother of all hangovers will have to be addressed ... but not for some time yet ...
At the news conference on Wednesday, the Chairman was asked if it was time to start "talking about, talking about" slowing the central bank's buying of $80 billion in bonds each month. Powell let out a laugh before answering "Not Yet" ...
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