The economy is hotting up ...
Official data from the Office For National Statistics this week revealed "the economy is hotting up". UK GDP is estimated to have grown by 2.3% in April, as government restrictions continued to ease.
Compared to prior year, the economy grew by 28%. Construction activity was up by 80%. Manufacturing output increased by 40%. Service sector activity increased by 30%. The increase in the service sector was driven by a surge in retail expansion with strong growth in education, accommodation and food.
Construction activity slowed slightly in the month. Developments in the service sector were faster than we had expected. The service sector expanded by 3.4% compared to March.
The return to work continues. At the end of April, 3.4 million were on furlough compared to 4.7 million at the start of the year. We now expect this number to fall to around 2 million through the second quarter. Data from the ONS suggests the number may have fallen to 1.8 million at the end of May.
For the year as a whole, we now expect growth of 7.5% this year and over 5% next. Thereafter, growth is expected to return to an underlying trend rate of 2% extending to 2025. Want to know more? We will be expanding on our five year forecasts at the Saturday Economist Live Session later this month.
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US Inflation on the rise ...
In the U.S. inflation spooks shuddered as CPI inflation hit 5% in May. The Fed shrugged. Markets moved on. Ten year bond yields fell eleven basis points to 1.46. Nasdaq moved higher, the S&P moved sideways, the Dow closed lower but not by much. Gold prices eased by $15 dollars. Oil prices moved up, one dollar. Inflation remains, as far as the Fed is concerned, "always and everywhere, a transitory phenomenon".
It was all about "Oil Wells and Car Wheels". The oil price comparison with the 2020 slump to blame. Gasoline and Fuel oil prices were up by over 50% in the month. Transportation costs were up by 11%. Second hand car prices were up by 30%. Buyers are scrambling to buy depleted show room stocks. Production of new cars is hampered by supply shortages in a world of "Chips with Everything".
The Fed is relaxed about inflation. Officials indicated they expect interest rates to remain close to zero until 2024. Fed forecasts for growth have been increased to 6.5% this year, thanks to the fiscal stimulus and the success of the vaccine roll out. No thoughts of tapering for the moment. Bond purchases will continue until the central government deficit slows.
Expect the same in the UK. Rates on hold. The Trillion Pound bank note on offer to the Treasury until the central government deficit falls to around £100 billion. That could happen in fiscal 2022/23. Until then we remain trapped on Planet ZIRP with central bankers as buyers of last resort.
Good News For Bitcoin ...
Good news for "hodlers" of Bitcoin. El Salvador has become the first country in the world to accept Bitcoin as legal currency. President Nayib Bukele at the Bitcoin party in Miami this week said "The decision will help to push humanity in the right direction". El Salvador is in negotiations with the IMF to secure a $1 billion dollar loan. That's about 28,000 bitcoin at closing prices. A positive decision from the IMF on the loan, would be a bigger push for Central American humanity, he might have added ....
That's all for this week, we will be back with more next week, stay safe ... see you on the 25th ...
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