Market Watch 03.05.2021

1. UK economy set to recover post Covid-19. The UK’s GDP is forecasted to grow by 6.8% in 2021 – the fastest bout of growth the country has seen since wartime production kicked into gear in 1941. This analysis was conducted by the EY ITEM Club, a well-respected economic forecasting organisation. Interestingly, the group originally projected a growth rate of 5%, but this has been the relegated to the months of April to June alone, due to the promised reopening of the UK economy (at long last), along with the Bank of England’s accommodating monetary policy of leaving interest rates essentially within the Zero Lower Bound. The forecasted growth in UK GDP for 2021 necessarily results in positive unemployment forecasts. The ITEM Club again is optimistic, drawing down its original end-of-year forecast from 7% to 5.8%. This is an extremely significant forecast, given the slump that occurred in March 2020. The Office for National Statistics predicts that because of this slump – which was born out of constrained business activity – GDP fell by 9.8%; its biggest annual drop in three centuries. Yet, 2020 Q2 held the greatest economic nightmare – an even greater reduction in GDP of 19.5%. The first lockdown took hold and gave no quarter. Perhaps governments will learn a lesson from these statistics. An automatic stabiliser, like the furlough scheme does not cure a recession, it only treats it. When motor vehicles are operating at high accelerations, a sudden break or turn can cause it to spiral out of control, and eventually, ground to a halt. This is a fitting metaphor for the economies of the world. Eventually, sooner rather than later being preferable, the economy has to begin churning again. Thankfully, it seems that Prime Minister Boris Johnson is committed to this ideal with his Roadmap out of lockdown.

2. Fed to thank for US recovery. Mythologised investor and CEO of Berkshire Hathaway, Warren Buffet stated in the aforementioned company’s Annual Shareholder meeting that the Central Bank was to thank for the propping up of the US economy and its corporate debt markets, during the time of Covid-19. Specifically, Buffett has praised the work of Federal Reserve Chairman Jerome Powell for his efforts, along with the US government with regards to fiscal stimulus. In March 2020, most if not all of the major market indexes slumped, American indexes following suit. This culminated in companies issuing debt as an alternative to equity. Berkshire Hathaway was one of these companies. In fact the Oracle of Omaha’s investment company issued a whopping £500 million 10-year bond in the same month. Yet this fad was not to last; that is until the Fed launched liquidity facilities as a means of keeping the bond market stable and ticking over. With investment from the US Treasury, the Fed was able to enter the corporate bond market and subsequently allow firms to sell bonds to the Fed, Berkshire being a customer. In fact, the Fed bought $40 million in bonds from Berkshire Hathaway and continued to purchase corporate bonds and bond ETFs until the end of 2020. Mr Buffet praised Mr Powell for his “speed and decisiveness” in anchoring the corporate debt market and that his continuous persistence on ensuring increased fiscal support was invaluable. Mr Buffett spoke very positively about the position of the US economy to date, specifying that it was running in “super-high gear”, but caveated it with saying that those companies that sold bonds through the March-April period of 2020 ought to send a letter of thanks to the Federal Reserve.

3. UK Private sector to face summertime boom. The Confederation of British Industry (CBI) anticipates a massive bout of summertime growth, perhaps the highest in six years. Within the next three months, the CBO expects the Private Sector to grow roughly 32%. What is noteworthy is that within the last month private sector activity rose 24%. Professional services industry and the manufacturing industry are set to grow considerably, yet consumer services are expected to flatten slightly. The UK economy is set to lift-off this summer but it should be borne in mind that this growth will manifest itself differently within different industries. The concern regarding companies facing financial hardship having to produce financial statements, along with business rate/rent and VAT freezes would naturally have increased growth in the professional services industry. Growth in consumer-oriented businesses has likely been flat due to negative externality of social distancing; few businesses have had consistent and tangible face-to-face dealings with customers. Yet, as manufacturing firms can produce, they will produce, and this has allowed them to thrive, Furthermore, as many professional services firms, be it law or accounting firms, have migrated to the online sphere of doing business, this has aided them in continuing their operations, free of constraints resulting from the imposition of lockdown. As the UK economy opens up to capacity as the summer arrives, I would expect the growth rate of consumer-oriented firms to increase rather quickly, and perhaps, that the growth of both the professional and manufacturing industries to reach somewhat of a steady state.

4. Spain recovery plans. In the last weeks, several EU members prepared their recovery fund plans for submitting them to Brussels. Portugal, Germany and Greece have already submitted their plans but others missed Friday’s deadline. The European Commission has two months to evaluate the schemes ahead of member states’ decision on releasing the funds. Last week, Spain has sent its plan to spend €140bn from the EU coronavirus recovery fund. The Socialist prime minister, Pedro Sánchez, declared that the plan will transform the country’s economy in the same way that Spain’s entry into the European Community did in 1986. In addition to the €70bn of grants that Madrid plans to get between 2021 and 2023, the government intends to take out an equivalent amount of loans from 2024 to 2026, to make sure that their economy will rebound. Spain, which has suffered greatly from the pandemic in human and economic terms, is one of the countries set to receive most from the €750bn recovery fund, known as Next Generation EU. There has been some criticism regarding the transparency over how the money will be allocated and some economists are worried that the resources may not deliver as much growth as the government expects. The government has already revised down its growth forecast for this year from 9.8% to 6.5%, because some EU funds are set to be spent later than the government expected. Reyes Maroto, Spain’s industry and tourism minister, said the planning process was open and responded to sectors’ demands. “We’ve been as transparent as a government can be, setting out spending in the budget,” she said. “There has been a dialogue with all the actors to design the vision that we want for Spain.” EU funds will contribute to €10bn of investment in a planned electric car hub. The country also wants to increase its pharmaceutical sector, in line with plans to increase self-sufficiency and manufacturing’s share of GDP, which has declined in the last years from 16 to 11%.

5. US began Afghanistan withdrawal. After Joe Biden announced the withdraw of US military from Afghanistan, last Thursdays the White House confirmed that the military has begun its withdrawal and proactively deployed additional troops and military equipment to protect forces in the region, ending America’s longest war. The US military has been since the September 11 terrorist attack in Afghanistan making the war the longest one in the Middle East and Central Asia. The removal of approximately 3,000 US service members coincides with the 20th anniversary after the attack in 2001. According to a deal closed by Donald Trump and the Taliban last year, the foreign forces would have had to leave the region by May 1. However, due to other priorities, such as the pandemic and the recovery of the economy, the process of withdrawing starting last week. According to the White House, “potential adversaries should know that if they attack us in our withdrawal, we will defend ourselves, [and] our partners, with all the tools at our disposal.” The Pentagon has temporarily provided B-52H Stratofortress aircraft to US Central Command, that oversees American operations in the Middle East. A US Navy bearer strike group is also in the region to provide support. During this time, the Defence Department leadership will continue to assess the need for additional military capabilities as the departure of US and coalition forces continues. The withdraw might takes a few weeks until the last troops are leaving the region.

Thank you to James Ballentine for his collaboration and in-depth analysis!

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