How fast is the UK economy rebounding?

Market dynamics

How fast is the UK economy rebounding?

Following the economic contraction at the beginning of the year, investors will find out this week how fast the UK rebounded following the relaxation of the blockade restrictions and the announcement of the second quarter gross domestic product on Thursday. Crucially, the June data will also provide an early indication of whether the spread of the Delta coronavirus variant hinders recovery.

After contracting 1.6% in the first quarter, economists expect a quarter-on-quarter growth of 4.8%, slightly lower than the Bank of England’s 5% forecast.

The lower-than-expected data may hit the pound sterling and boost British government bonds as the market postponed the “moderate tightening” timetable proposed by the Bank of England at its August 5 meeting.

But Kallum Pickering, a senior economist at Berenberg, said that when judging the impact of these data on the outlook for monetary policy, the details will depend on the details.

“You may see disappointing manufacturing data in June because supply chain issues have also hindered German manufacturing, but I don’t think this will change the overall picture,” he said. “The big surprise for service data in June will be even more worrying because it will drive the inflation story.”

Pickering said he expects the Bank of England to raise interest rates for the first time in August next year, but if growth and inflation pick up faster than expected, the interest rate hike may come sooner. Tommy Stabington

Will the rapid pace of US inflation continue in July?

Investors and economists expect July consumer price data to show that inflation in the United States will continue to rise, although the growth rate is lower than the 13-year record June release.

On Wednesday, the Department of Labor will release monthly consumer price index data. According to a Reuters survey, economists expect a 0.5% increase from the previous month, compared with a 0.9% increase in June.

Approximately one-third of the increase in June was attributable to rising used car prices, and supply chain bottlenecks hindered new car production. This supports the assertion of Jay Powell, Chairman of the Federal Reserve Board, that this year’s inflation spike will prove to be temporary and will subside as the global economy normalizes. Despite this, the current price increase is still alarming.

“I don’t expect inflation to increase significantly further, but I think it’s too early to see a significant drop in inflation. If you look at the manufacturing survey, the evidence of supply backlog is still very strong. As long as these persist, we should expect inflation. Will stay high,” said Eric Winograd, senior economist of fixed income at AllianceBernstein.

The June inflation data had a counterintuitive effect on the US government bond market. Normally, bonds will weaken due to high inflation, which will erode their fixed periodic interest payments. They did fall immediately after the June report was released, which pushed up yields, but then yields fell because investors were betting that the Fed would maintain near-zero interest rates despite rising prices. The yield on the benchmark 10-year Treasury note has since fallen to a five-month low. Kate Duguid

Will the deterioration of German investor sentiment deepen?

Economists worry that the rise of variants of the delta coronavirus will mean a bumpy road ahead for the largest economy in the euro zone.

In July, the much-watched Zew economic sentiment index Germany’s index fell from 79.8 to 63.3, the lowest level since January and well below the consensus estimate of 75.2.

Carsten Brzeski, global head of macro research at ING, said that he expects the reading to fall to 58 in August, reflecting concerns that as the Delta strain spreads and vaccination rates slow down, new restrictions will appear in the fall.

Oliver Rakau, chief German economist at the Oxford Economics Institute, also expressed this view. He said more pessimistically that he expected the index to be 50, which would be the lowest level since November 2020. . In addition to the risks posed by Delta Air Lines, Raco also mentioned the continued industrial supply bottleneck.

As the restrictions on the coronavirus among German trading partners began to relax, the sudden surge in activity meant that companies had to fight unprecedented supply chain issues.

In June, Germany’s purchasing managers’ index seemed to indicate that some congestion had begun to ease. But Rakau pointed out that during July, Google’s mobile data showed that the rebound in service activity was losing momentum.

Due to the close tracking of the German stock market, the Zew Index is largely dominated by financial market developments, but it also has a good track record in predicting turning points. Brzeski said, “After two consecutive declines, the third decline will be a turning point, indicating that the rebound of the German economy is losing momentum.”

Industrial production data Released on August 6 Not a good sign. They showed that the output in June fell by 1.3% from the previous month, which was far below the 0.5% growth expected by economists. This makes production 6.8% lower than the February 2020 level.

Capital Economics chief European economist Andrew Kenningham said: “As the manufacturing industry has not yet reached full capacity, it is still a question mark whether the economy will return to pre-pandemic levels in the fourth quarter.” Federica Koko

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