GOVERNMENTS HANDLING OF COVID CRISIS IS COMING UNDER INCREASING SCRUTINY

GOVERNMENTS HANDLING OF COVID CRISIS IS COMING UNDER INCREASING SCRUTINY

This week has seen further evidence that the Covid pandemic continues to transform from an economic and health crisis into a political struggle as well. Current Japanese prime minster Yoshihide Suga will face a challenge to his leadership as the ruling Liberal Democrat Party has called for a vote on his leadership in the face of growing criticism of his government’s handling of the pandemic. Next month also sees parliamentary elections in Germany. Current chancellor Angela Merkel is retiring from politics, so this is not a direct vote on her handling of the crisis, but her ruling Christian Democrat party is coming under pressure in the polls, in part due to the government’s response to Covid.

Elsewhere, the US House of Representatives has pushed through the next phase of Joe Biden’s stimulus and welfare reforms without Republican support. Biden’s handling of the Covid crisis is also likely to be a factor in the mid-term elections next year and if the Democrats lose their slim control of Congress his hands will be tied for the rest of his term. The urgency with which he is pushing through his reforms is understandable.

GLOBAL: FURTHER SIGNS THAT ECONOMIC RECOVERY IS SLOWING DOWN

This week’s PMI figures show that global recovery has continued to lose momentum as supply constraints begin to bite. UK composite PMI fell to 55.3 from 59.2 in July, its lowest figure in 6 months. Output growth in the services sector fell the most as Covid restrictions and staff shortages hindered business activity. Manufacturing was more resilient, but it too recorded a decline. Eurozone figures also dropped but at a much lesser degree as the composite PMI fell to 59.5 from 60.2. Contrary to the UK, services sector growth exceeded manufacturing in the Eurozone even with the widespread supply chain delays. The same pattern has been seen in the US as staff shortages and supply chain delays have caused output to fall. It is important to put this in context. Although output growth is falling it remains at the high end historically for most developed economies.

On a more positive note, businesses have confirmed that consumer demand has remained strong. The Confederation of British Industry reported similar problems regarding the supply of inventory, but that manufacturing output growth has remained very robust.

US: BIDEN’S REFORM AGENDA GETS A BOOST FROM CONGRESS

Democratic politicians in the US Congress have taken a big step towards pushing through President Joe Biden’s ambitious plans for further infrastructure investment and welfare and social reforms. The House of Representatives voted on strict party lines to advance the $3.5tn plan which aims to increase spending on education, green energy and expand childcare provision, as well as raise taxes for corporations and the wealthiest Americans. Adopting the budget reconciliation procedures to try and pass the bills means they need a simple majority in the Senate, but with the Democrats’ majorities in both houses razor thin there is still sufficient scope for disagreement amongst Democrats to scupper the plans.

The latest economic data from the US shows recovery starting to cool. Although the revised figure for GDP growth in the second quarter is 6.6 per cent, slightly up from 6.3 per cent seen in Q1, the latest jobless figures show new unemployment claims increased for the first time in five weeks as the Delta variant of the coronavirus continues its rapid spread.

COMMODITIES: CHINESE CONTAINMENT OF DELTA BOOSTS COMMODITIES

Commodity prices rallied this week as China got its latest outbreak of the coronavirus under control, reviving optimism about the level of demand for industrial commodities in the country. The price moves followed a sharp sell-off last week when iron ore suffered its largest single day drop in over a decade, falling around 35 per cent, as a result of increased fears about the spread of the Delta variant in China hindering its economic recovery. However, China’s announcement on Monday that it had no new Covid-19 cases for the first time since July sent iron ore prices back up over 9 per cent and oil prices rose to almost $72 a barrel.

The Delta variant has proven to be the strongest mutation of coronavirus so far. Away from China cases have continued to surge, particularly in areas with low vaccination rates, and the total number global cases has doubled in just six months. This has increased investor fears regarding global economic recovery, thus creating a lot of volatility in financial markets overall.