MUNIX COMMENTARY – September 3rd
Summer is ending, autumn appearing
The seasons are a’changing. The long warm summer evenings are fading and as autumn approaches there is a chill in the air.
It is the same in the world of economics. Into the summer, there was a stream of reports signalling that consumer and business activity were rebounding strongly from the woes caused by the pandemic last winter and spring. On some estimates, GDP in the G7 largest economies only rose at an annualised rate of 2.4% in the first quarter of 2021 but jumped by over 6% annualised in the second quarter. Businesses employed more staff, consumer confidence rose, and households ran down their savings, whether on essentials or entertainment, whilst governments continued to be very supportive through a stream of subsidies, loans and grants.
However, the latest round of business surveys confirm that the peak of activity was seen several months ago, with a noticeable slowdown taking place into September. This has been led by China and emerging markets, where policy makers are deliberately withdrawing support, but ripples through into many G7 economies as well.
To sum up the various country reports into one figure, JP Morgan aggregate the purchasing manager reports from a global survey of manufacturing companies. This number has declined steadily from a peak of 56 in May to the latest figure of 54. A figure above 50 continues to suggest expansion in manufacturing, but at a slower rate. Companies are reporting large order books but complaining about a mixture of supply side shortages, in labour, key components or transportation. Service sector reports show a similar downward path, albeit generally at a higher level.
A classic example comes from car manufacturers. Demand is high but supply is very constrained, especially by the numerous semi-conductor chips so necessary to run increasingly advanced vehicles. Hence, the latest automobile sales in the USA, the second largest market after China, collapsed to 13 million units, the lowest figure outside the pandemic. Companies are being forced to shut down plants for short periods, amidst warnings that chip shortages could continue well into next year.
There is little reason to be concerned that this slowdown will result in a further recession – putting aside another dangerous variant of the virus. Into 2022, banks are very willing to lend, unemployment is declining steadily in most countries and certain groups of workers are seeing rather attractive wage increases. However, it is noticeable that economists are beginning to lower rather than raise their forecasts for the coming year. The balance of opinion is shifting towards global GDP growth running about 5% in the second of this year and back towards a trend 3-4% in 2022. A noticeable headwind will be the turnaround in fiscal policy – the days of ever larger budget deficits are over, and the debate is moving more towards how governments will raise taxes to help with their spending commitments. Obvious examples would be discussions about capital gains and income tax increases on the wealthy in the USA to offset some of the costs of the infrastructure package, or here in the UK which taxes should rise to meet the cost of the social care programme. The Chancellor has a complicated mixture of issues to consider as the furlough ends, a three-year spending programme is required, the NHS and education demand extra resource, against the backdrop of the largest public sector deficit in peacetime.
Some investors in bond markets will continue to worry about inflation figures well above central bank targets – the latest European inflation figure reached 3% a year. However, other investors will point to clear signs that into the autumn months the evidence is growing of slower economic activity into the winter, discouraging any central bank from being too aggressive as it begins to taper or raise interest rates into 2022.
Andrew Milligan is an independent economist and investment consultant. This note should be considered as general commentary on economic and financial matters and should not be considered as financial advice in any form.
Andrew Milligan an independent economist and investment consultant. From 2000-2020 he was the head of global strategy at Standard Life/Aberdeen Standard Investments, analyzing the major financial markets for global clients. He currently assists a range of organizations with reviews of their investment processes, advice on tactical investing and strategic asset allocation, and how to include ESG factors into their decision making