CONSUMER SPENDING TAKES OVER FROM GOVERNMENT STIMULUS AS THE DRIVER OF POST-COVID RECOVERY

CONSUMER SPENDING TAKES OVER FROM GOVERNMENT STIMULUS AS THE DRIVER OF POST-COVID RECOVERY

This week has seen mixed signals about the outlook for inflation. The latest numbers show annual US consumer inflation remains high, at 5.4 per cent, but the month-on-month increase has begun to slow. Areas which have experienced very rapid price increases this year, such as second- hand cars and fuel costs, have seen inflation fall considerably. Housing costs, a big contributor to the overall figure, continue to rise. However, there was nothing out this week that is likely to change anyone’s views on where inflation is going and how long it will remain elevated.

The GDP figures in the UK show the quandary facing policy makers. The recovery in GDP has been driven mostly by consumer spending in shops, hotels and restaurants but this spending is mostly a resumption of activity, not additional spending over pre-Covid levels. Despite recent growth the UK remains below pre-pandemic economic output. But any signs that inflation is other than temporary will force a response from the Bank of England and risks halting the recovery and with it an end to the plan to build back better.

US: INFLATION REMAINS HIGH BUT SHOWS SIGNS OF COOLING

It was a positive week for US equities despite inflation remaining very high. US consumer price inflation increased 0.5 per cent in July, keeping the year-on-year figure at 5.4 per cent. Although inflation remains at its 20-year high, the data suggests that it is beginning to slow as the monthly figure reduced and core inflation is down from 0.9 per cent in June to 0.3 per cent. The decline in core inflation can be seen to strengthen the Federal Reserve’s view that inflationary pressures will be transitory. However, some committee members indicated that the current levels of inflation could justify a step towards tightening the central bank’s ultra-loose policy.

Wall Street stocks closed at highs this week after the US Senate passed President Joe Biden’s infrastructure bill that will provide an additional $550bn to upgrade America’s crumbling transport systems. Following the announcement, the S&P 500 index gained 0.5 per cent and the US dollar strengthened, reaching its highest level against the euro since March.

UK: REOPENING CONSUMER SPENDING FUELS GDP GROWTH

Consumer spending as the UK emerged from lockdown helped the UK’s economy grow at 4.8 per cent in the second quarter of the year. The biggest contributions to growth came from retail, hospitality and education. In total, consumer spending accounted for 4.1 per cent of the 4.8 per cent increase. The services sector saw the biggest change from the first three months of the year. In Q1 services output fell 2.1 per cent, but this increased by 5.7 per cent in Q2. Construction output also recorded strong growth and is now effectively back to pre-pandemic levels. Manufacturing growth was more muted, however, recording a modest increase of 0.5 per cent.

Overall GDP remains 4.4 per cent below its pre-pandemic level. Trade is one area that remains subdued as the recovery in trade of goods is partially offset by further weakness in services trade. The resurgence of Covid-19 infections in July mean GDP growth may slow in Q3 but the UK is currently the fastest growing major western economy and is on track to return to pre-Covid economic output later this year.

OIL: PRICES FALL ON CONCERN THAT COVID SPREAD WILL HIT DEMAND

The oil price has seen more volatility this week as the continued rapid spread of the Delta variant of Covid reduced expectations for demand later this year. Brent Crude hit $75 in July but has since fallen back to around $71 a barrel as rising infection numbers and new restrictions aimed at preventing the spread of Covid are introduced. This week the International Energy Agency revised its forecast for oil consumption for the rest of this year due to less travel and economic activity, particularly in Asia.

Following rapid price rises earlier this year, in July the OPEC+ countries agreed a slight increase in production to prevent further price increases. This week US president Joe Biden called for further production increases to avoid high oil prices limiting global economic recovery, however, the difficulty in agreeing even the modest increase seen in July makes a further increase from the OPEC+ countries unlikely.