Chief Economist’s Weekly Briefing – Stimulus windfall delivers

The US economy bounced back sharply in Q1 thanks to a successful vaccination drive and in particular generous government support. The latter meant personal income in the US posted its biggest ever increase in March (a series that goes back to the 1940s!). That’s what you call shock therapy for the recovery. And Northern Ireland’s non-essential retail finally reopened its doors which coincided with news that every adult over the age of 18 will receive a £100 High Street voucher later this year.  

Smash! No, not the instant mash. Rather the sound of the spending thermometer breaking. Because UK card payments leapt once again, by a mercury-rising 21ppts, to reach 110% of Feb 2020 levels. Similarly glass-shattering were online job adverts, now 103%. And most other UK indicators are warming nicely, if not quite as cracking. So, on Saturday 24th April, dinner reservations reached 62% their 2019 bookings. Not bad, considering they were precisely 0% on April 10th. Footfall is now 80% back to normal. Traffic 93%. Interestingly, although new firm incorporations are the lowest this year, they’re still 21% higher than 2019.  

Protected. As daylight keeps increasing, so is the number of people who are protected from Covid-19. According to the latest serological survey of the UK population, by the middle of April 60-70% of the UK adults have antibodies against SARS-COV-2 in their blood. This includes both people who developed antibodies after an infection and due to a vaccination. This test is unable to detect T-cell response (other type of immunity), so it is possible that the level of immunity is higher. The proportion of people with antibodies is increasing with age, which is not surprising, considering the priority of vaccinations.

Rebounding. With a 6.4% annualized increase in Q1’21, US GDP retraced close to 96% of its pandemic era decline. A swift vaccine distribution and huge levels of government stimulus sit behind this stellar performance. The boost in GDP came across a wide range of areas including higher residential and nonresidential investment alongside rising government spending. But the star of the show was upsurge in consumer spending, most notably for goods (+23.6%). More remarkable still, the savings ratio jumped to 21%, up from 13% in Q4-20, despite the spending splurge. That’s the power of the numerous fiscal packages that have seen cash distributed to households.

As you are. The US of A’s economic recovery continues at pace with fiscal and monetary policy stimulus firing on all cylinders. Not surprisingly the Fed chose to sit on its hands in April keeping its Fed Funds Rate close to zero and continuing with its open-ended asset purchase programme (QE). Whilst acknowledging that economic indicators and employment have strengthened, the sectors most affected from the pandemic remain weak. Rising inflation is largely due to “transitory” factors and the Fed downgraded its assessment of the risks posed by COVID for the economic outlook. Jay Powell, Fed chair, signaled that the central bank was still ‘a long way’ from withdrawing its sizeable monetary support.  

Double-dip.  In stark contrast with the recovery taking hold in the US, eurozone GDP fell by 0.6% in the first quarter according to flash estimates. Coming on top of a 0.7% contraction in Q4 of 2020 means the eurozone is back into a technical recession. Output fell across most large economies – including Germany (-1.7%), Italy (-0.4%) and Spain (-0.5%) – as lockdown measures weighed on household consumption and service sector activity. The main exception was France, which managed 0.4% growth, beating expectations. The question now is whether vaccination programmes are proceeding fast enough to return the EZ to growth in Q2.

A U-shaped crisis. The labour market fallout has been limited in the UK. But beyond the headline numbers lies significant stress for two working age groups – the young (18-25 years) and older workers (above 50 years). While the impact on the former has been widely flagged, a study by Resolution Foundation shows that older workers have seen the biggest drop in employment since the 1980s, particularly women. What’s worse, historical experience shows that once out of work, older people struggle more than younger counterparts to return to work and when they do, they typically face a hit to their earnings. This builds a strong case for specialized support, sensitive to their retraining needs.

Re-writing the rule book.  Governments around the world ripped up their fiscal rulebooks when responding to the pandemic and the economic consequences of reducing transmission. As recoveries in Europe and the US look more secure policymakers are considering what the new rules should be. The UK’s National Institute of Economic and Social Research (NIESR) has given them a primer. It sees the old rules as too rigid and too beholden to the electoral cycle. The UK has had about six different fiscal tests in the last eight years, not exactly an model of consistency. Instead it proposes that Budgets focus more on what could happen, using scenarios, and provide more analysis on the implications of policy choices.

When the chips are down. China’s PMI readings for April tell us the economy’s recovery remains robust. The services and construction PMI fell from from 56.3 to 54.9, while manufacturing edged down to 51.1 from 51.9. But both are above the levels that prevailed in the two years leading up to Covid. The surveys also suggest global supply chain constraints won’t alleviate soon (the widely reported shortage of semiconductors is one example) with delivery times continuing to move higher. That, and other factors, are contributing to higher input and output prices. Inflationary pressure are still worth keeping an eye on.

Leave a Reply