Economic Commentary – May 2021

June 2nd, 2021, by Chris Davis

An accident waiting to happen

The global growth outlook remains set for a period of synchronised global expansion through the second half of 2021 and into 2022. As the recovery strengthens, the key topic of conversation in company earnings calls and asset manager positioning is speculation on inflation and whether it will be sustained at current levels, go higher, or dissipate. Then if inflation is more than ‘transitory’ when and how will central banks withdraw their stimulus.

Running warmer

Economic news has been generally positive over recent weeks, suggesting the worst is behind us. In the US in particular the rate of expansion is impressive. In the recent IHS Markit PMI report highlighted that improving demand stemming from consumer confidence and the further reopening of the economy boosted companies order books.

Manufacturers noted:

“order volumes increasing due to material shortages and efforts to stockpile amid rising costs.” … “The steep rise in costs fed through to the sharpest increase in output charges since data collection began in October 2009, with record rates of inflation registered for both goods and services as soaring demand boosted firms’ pricing power.”
IHS Markit

This much-anticipated jump in inflation arrived in official figures in early May. The U.S. CPI numbers showed core prices increasing 0.8% in April, rising 4.2% over the last 12 months. Some of increase is attributed to higher energy prices and the low base effect of 12 months ago, but there were improvements in economic conditions and a return to pre-pandemic price patterns. There were also some surprising price increases. For example, used car prices were up 21% as a combination of factors contributed to rally in used-car demand. The inflation data was a surprise to many economists. The highest estimate for US inflation by the 39 economists posting on Bloomberg was 3.9%, so 4.2% was a big surprise to the upside.

This is not just a US issue. In the UK the Retail Price Index rose to 2.9% in April, the biggest increase since June 2019 and above market forecasts. Factory gate prices of goods produced by the UK manufacturers increased 3.9% over the year in April 2021, the most since October 2018 and beating market expectations. Petrol products had the highest annual growth rate of any component of output prices (50.3%), driven by the very low prices a year ago. Business activity across the UK private sector expanded at a rapid pace in May according to the IHS Markit. CEO confidence is at an all-time high as concerns about the impact of the pandemic continue to fade. Unsurprisingly from the demand side of the economy hotels, restaurants and other consumer-facing services were strong, with gains reported across the board in all sectors. Given the strong economic output, orders and optimism, we expect GDP growth to be sharply higher in the second quarter.

In Europe, confidence regarding a recovery rose as signs of progress with vaccinations finally began to come through, helped by Covid-19 cases falling across the bloc. The composite PMI hit a nine-month high at 53.7, while the services PMI edged above 50. The European Central Bank maintained the increase in pace of the PEPP that was initiated in March due to concerns about rising yields. Producer prices in Germany increased 5.2% over the year to April of 2021, the biggest gain since September of 2011 and above market expectations. The main source of upward pressure came from raw materials and energy…..

Chris Davis
Chief Investment Officer

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