Economic data has generally been strong recently and the confidence financial markets have held in rapid recovery as restrictions are eased, seems vindicated. This has supported the trend of rising equity markets particularly in the US with the technology sector returning to favour in April as more economically sensitive stocks, which have generally prospered since the announcement of effective valuations in November last year, take a breather. Accompanying this has been further rises in government bond yields.
The rollout of COVID-19 vaccinations has continued to proceed very effectively in the US and UK with c. 50% of their respective populations now having received at least one dose. This should allow a sustained reopening of economic activity to be maintained without the risk of strict lockdown measures being imposed once again. In continental Europe, the pace of vaccinations has now accelerated after a difficult start and with supply improved the daily rate of vaccinations has increased significantly, enabling Europe to commence economic recovery although with a lag compared to the US and the UK.
President Biden’s first 100 days in office have now passed and for investors the most important aspect is that it is clear the President is committed to large scale spending. In addition to the $1.9 trillion American rescue plan, he has outlined plans for two more spending packages; the $2.3 trillion jobs plan which is designed to invest in and improve the country’s infrastructure and the $1.8 trillion American family’s plan which will aim to ensure a more equitable recovery with the extension of tax credits. This has been accompanied by proposals to increase the corporate and top marginal rate of income tax. Capital gains tax rates are also expected to rise. These additional plans are likely to face some opposition in Congress and compromises are likely.
The US consumer will be a key area of support for economic growth and there are signs of confidence here with vaccination progress being a factor and a higher than usual level of household savings being accumulated during the pandemic. Combined with the $1,400 stimulus cheques to households from the government, optimism seems well supported. Against this backdrop, it is expected that there will be a period of exceptional economic growth, the US economy expanded at an annualised pace of +6.40% in the first quarter of 2021 and should accelerate from here. Jobs growth has been accelerating, although stalling in April. With unemployment in the US standing at around 6% the Federal Reserve chairman has been keen to stress that he expects it to be some time before the goal of maximum employment is reached, which provides one of the justifications for maintaining the loose monetary policy.
A key concern for markets in the US and globally is to what extent the rise in inflation currently coming through is transitory, which is the expectation of the US Federal Reserve, in part due to the base effect of declining prices last year. Any sign of sustained higher inflation would be expected to impact market sentiment negatively.
Although Europe has struggled to get on top of the recent COVID-19 outbreaks the region appears to be heading in the right direction as vaccination programmes accelerate giving confidence that economic recovery can begin concertedly in the second quarter. Increased demand for exports from the US should provide support for the eurozone economy and the contraction in the first quarter of -0.60% was lower than anticipated as businesses adapted to dealing with restrictions. Hopes of rapid recovery are also supported by high levels of consumer confidence.
Inflation remains muted in the eurozone compared to the US and this means less pressure on the European Central Bank to tighten monetary policy.
As lockdown restrictions have been eased in the UK, economic data has improved with retail sales increasing and low levels of COVID-19 cases/deaths despite the relaxation. The high proportion of the population either vaccinated or with antibodies against the virus should support a sustainable path to the reopening of the economy.
Although management of the pandemic in developing countries is generally heading in the right direction, parts of the developing world continue to struggle with the crisis. India in particular saw a substantial deterioration in April underscoring the need for the vaccination rollout to be urgently broadened to the emerging world. The high level of positive tests and restrictions imposed in India are likely to push back economic recovery until the second half of the year, although growth prospects for Asian economies generally remain much stronger than in the developing world including in China where the economy continues to normalise as the impact of the pandemic recedes.
The developed world looks to be well on the road to recovery nevertheless and the coming months are likely to see very impressive economic data as a result. The extent to which inflationary pressures are the temporary consideration that central bankers are indicating or whether high levels of growth lead to more persistent price increases, will be a key concern and policy makers will have to try to find a balance between convincing markets they will continue to provide support even when the global economy is performing very strongly.
|2021 Year to Date|
|FTSE World ex-UK (GBP)||+7.08%|
|FTSE Actuaries UK Conventional Gilt All Stocks||-6.46%|
|FTSE Actuaries UK Index-Linked All Stocks||-5.00%|
Performance to 10/05/2021
|Bank of England Base Rate||+0.10%|
|Inflation (Retail Prices Index)*||+1.50%|
* March 2021