Following a contraction at the start of the year, investors will find out this week how quickly the UK bounced back as lockdown restrictions were eased, with the release of second-quarter gross domestic product on Thursday. Crucially, data for June will also provide an early indication of whether the spread of the Delta coronavirus variant has held back the recovery.
Economists have pencilled in quarter-on-quarter growth of 4.8 per cent, slightly below the Bank of England’s 5 per cent forecast, following the first quarter’s 1.6 per cent contraction.
A weaker than expected figure might hit the pound and give UK government bonds a boost, as markets push back the timeline for the “modest tightening” outlined by the BoE at its meeting on August 5.
But the devil will be in the detail in judging the impact of the figures on the outlook for monetary policy, according to Kallum Pickering, a senior economist at Berenberg.
“You could see a disappointment in June manufacturing data because of the supply chain issues that also held back German manufacturing, but I don’t think that would change the big picture,” he said. “A big surprise on June services numbers would be more concerning, as that is what is going to drive the inflation story.”
Pickering said he expected that the BoE would raise interest rates for the first time in August next year, but if growth and inflation picked up faster than expected there was a possibility an increase could come sooner. Tommy Stubbington
Will the rapid pace of US inflation continue in July?
Investors and economists are expecting consumer price data for July to show that inflation has continued to rise in the US, albeit at a slower pace than the 13-year record posted in June.
On Wednesday, the labour department will release its monthly consumer price index figures and economists expect to see a rise of 0.5 per cent from the previous month, according to a poll by Reuters, compared with a gain of 0.9 per cent in June.
Roughly a third of the increase in June was attributed to price gains in used cars, fuelled by supply chain bottlenecks that have hampered new vehicle production. This supports US Federal Reserve chair Jay Powell’s assertion that this year’s surge in inflation will prove to be transitory and will recede as the global economy normalises. Still, price gains are striking for now.
“I don’t expect further significant growth in inflation, but I think it’s too early to see it coming down meaningfully either. The evidence of supply backlogs are still pretty strong if you look at the manufacturing surveys. As long as those persist we should expect inflation to stay elevated,” said Eric Winograd, senior economist for fixed income at AllianceBernstein.
June’s inflation reading had a counterintuitive effect on the US government bond market. Typically, bonds weaken in response to high inflation, which eats into their fixed regular interest payments. They did drop in price immediately after June’s report, which pushed yields higher, but yields then fell as investors bet that the Fed would maintain near-zero interest rates despite rising prices. The yield on the benchmark 10-year note has since fallen to five-month lows. Kate Duguid
Will the deterioration in German investor sentiment deepen?
Economists are concerned that the rise of the Delta coronavirus variant will mean a bumpy road ahead for the eurozone’s largest economy.
In July, the closely watched Zew economic sentiment indicator for Germany slipped to 63.3 from 79.8, the lowest since January and well below the consensus estimate of 75.2.
Carsten Brzeski, global head of macro research at ING, said he expected the August reading to drop to 58, reflecting fears of new restrictions in the autumn as the Delta strain spreads and vaccination rates slow.
That sentiment is echoed by Oliver Rakau, chief German economist at Oxford Economics, who more pessimistically said he expected a reading of 50, which would be the lowest since November 2020. As well as the risks posed by Delta, Rakau cited persistent industrial supply bottlenecks.
As coronavirus curbs began to ease among Germany’s trading partners, a sudden surge in activity has meant companies have battled with unprecedented supply chain problems.
In June, Germany’s Purchasing Managers’ index appeared to show that some of the congestion had started to ease. But over the course of July, Google mobility data indicated that the rebound in services activity was losing momentum, Rakau noted.
Because it closely tracks the German stock market, the Zew index is heavily dominated by financial market developments, but it also has a good record of predicting turning points. According to Brzeski, “after two drops in a row, a third drop would be such a turning point, suggesting that the rebound of the German economy is losing steam”.
Industrial production data released on August 6 do not bode well. They show that in June production fell 1.3 per cent from the previous month, well below the 0.5 per cent gain expected by economists. That left production 6.8 per cent below where it was in February 2020.
“With the manufacturing sector still not firing on all cylinders, there is now a question mark over whether the economy will regain its pre-pandemic level in the fourth quarter,” said Andrew Kenningham, chief Europe economist at Capital Economics. Federica Cocco
How fast is the UK economy rebounding? - Financial Times
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