After a fortnight that has included a compromised COP26 agreement to phase down coal usage, cuts to HS2 but planned rail improvements for our Northern Powerhouse, pleas for people to get their booster jabs to save Christmas, our Prime Minister declare that “the UK is not a corrupt country” then not lose minutes of a meeting, but be unable to find them at present, Elon Musk run a Twitter poll as to whether he should sell 10% of his Tesla shares and Steven Gerrard join Aston Villa not as a stepping stone to his dream job at a big club, markets have been mixed as investors weighed a rise in US inflation against the EU’s more optimistic economic growth forecasts.
American markets fell slightly, after US headline consumer price index (CPI) increased at its fastest annual pace since 1990. This overshadowed news that weekly jobless claims had reached a new pandemic-era low. In contrast, European markets did well as the EU raised its economic growth forecast for the eurozone and industrial production fell less than expected. The UK’s FTSE 100 gained 0.6% as investors digested the latest gross domestic product (GDP) data. Over in Asia, the Chinese markets rose following reports that Beijing is considering easing rules to let struggling property developers sell off assets to avoid defaults.
European indices continued to rise this week following encouraging economic data from China where industrial output rose 3.5% in October from a year ago, beating expectations of a 3.0% increase. Chinese retail sales rose 4.9% year-on-year, significantly higher than forecasts of 3.5% growth.
The FTSE 100 was little changed after Bank of England governor Andrew Bailey said he was ‘very uneasy’ about rising inflation and had come close to voting for an increase in interest rates when policymakers met earlier this month. He was ‘very sorry’ that households were feeling the impact of rising prices, but that the Bank wanted to see what impact domestic and global issues were having on the cost of living before deciding on whether to raise rates. He told the BBC that current conditions were different because inflation was being driven by global supply shocks rather than demand pressure in the UK economy. The Bank forecasts that inflation is likely to hit 5% next year.
This week, the FTSE 100 has been weaker as it digested the latest employment data from the Office for National Statistics (ONS) where perversely good news is bad news. The number of payrolled employees rose by 160,000 to 29.3m between September and October despite the ending of the furlough scheme. The unemployment rate fell by a bigger-than expected 0.5 percentage points to 4.3%. These figures are likely to fuel further speculation that the Bank of England will increase the base interest rate when it meets in December.
Last week’s economic headlines were dominated by the latest inflation figures from the US, which revealed the headline CPI rose to 6.2% in October from a year ago, the fastest pace for three decades, largely because of faster-than-expected rises in the cost of fuel and food.
Compared with a month ago, prices surged by 0.9%, well above the 0.6% rise forecast by economists. Core inflation, which excludes energy and food, also rose more than expected by 0.6% from the previous month. The data came a week after Federal Reserve chair Jerome Powell admitted that high inflation was lasting longer than anticipated and it was difficult to predict the persistence of supply constraints.
Concerns about rising prices saw US consumer sentiment decline to its lowest level in a decade. The University of Michigan’s consumer sentiment index fell to 66.8 in November, down from 71.7 in October and well below the expected 72.4. Richard Curtin, chief economist of the university’s consumer surveys, said the decline was driven by “an escalating inflation rate and the growing belief among consumers that no effective policies have yet been developed to reduce the damage from surging inflation.”
President Biden said at the COP summit that the next Federal Reserve (Fed) Chair would be announced ‘fairly quickly’ but we are yet to find out who will lead the world’s most important central bank. Jerome Powell and Lael Brainard have both been interviewed for the role and both appear to be in the race. Governor Brainard is probably as dovish, if not more dovish, than Powell however does have differing views on bank regulation which has attracted the support of Senator Elizabeth Warren.
It has been traditional for an incoming President to reconfirm the Fed Chair (until Trump removed then chair Yellen), however there appears to be some unease on reconfirming a Republican for the role despite it generally being accepted that Powell did a good job during the height of the COVID-19 crisis. Markets are focused on Fed Policy given the focus on managing inflation and pivotal nature of monetary policy at this time. President Biden will want to avoid too much uncertainty over leadership, making an imminent announcement likely.
Here in the UK, data from the ONS showed the impact that supply chain problems are having on UK economic growth. GDP grew by an estimated 1.3% in the third quarter (July to September), a marked slowdown from the 5.5% growth seen in the second quarter when there was an easing in many coronavirus restrictions. The growth rate was below the 1.5% forecast by the Bank of England, with shortages of goods, labour and components weighing on activity.
The monthly figures showed GDP grew by 0.6% in September but remained 0.6% below the pre-pandemic level. Services output grew by 0.7% as the number of face-to-face appointments at GP surgeries grew, whereas production output declined by 0.4% following two consecutive months of growth.
More encouragingly, the European Commission increased its 2021 GDP growth forecast for the eurozone to 5.0% from 4.8%. The commission’s vice president Valdis Dombrovskis said measures to cushion the blow of the pandemic and ramp up vaccinations had “clearly contributed to this success”. GDP growth is forecast to be 4.3% in 2022 and 2.4% in 2023.
The commission also said inflation would reach 2.4% this year, before slowing to 2.2% next year and 1.4% in 2023. The eurozone’s budget deficit is expected to decline to 7.1% of GDP this year from 7.2% in 2020, and then fall to 3.9% and 2.4% in 2022 and 2023.
Elsewhere, data from Eurostat showed supply chain constraints held back manufacturing in September, with industrial production declining by 0.2% from the previous month. However, this was better than the 0.7% decrease predicted by economists in a Wall Street Journal poll.
Investors were also speculating that the ECB would raise interest rates next year amid a 13-year high in the rate of inflation. However, ECB president Christine Lagarde said a rate increase would be ‘very unlikely’ to take place in 2022. She was quoted by Reuters as saying that despite the current surge in prices, the outlook for inflation over the medium term remains subdued, and therefore the ECB’s three conditions for a rate hike are unlikely to be satisfied next year.
Lagarde also pushed back on expectations of a tightening in monetary policy, saying the ECB would continue to use emergency asset purchases to keep borrowing costs down. “An undue tightening of financing conditions is not desirable at a time when purchasing power is already being squeezed by higher energy and fuel bills, and it would represent an unwarranted headwind for the recovery,” she stated.
This week we bring you:
- Our latest true or false quiz
- A Minister for Demographics? – Views from a Corporate Bond Fund Manager
True or False Quiz
As usual, which of the following statements are true and which are false? Answers and context at the bottom of this update.
- There are more trees on earth than stars in the Milky Way or neurons in your brain.
- Australia will prevent Chinese companies from importing or investing in 63 technologies.
- The EU is looking to support South American economies by securing imports into its single market of beef, cacao, coffee, soy, palm oil, and timber.
- The word ‘catchfart’ means a follower of the political wind; one whose actions are guided entirely by the whims and desires of their boss.
- And in an entirely unrelated lexicon ‘circumbendibus’ means an answer or argument so convoluted and evasive that it isn’t really an answer at all.
- Forget women and children first, you had a better chance of surviving the titanic if you had a 1st class ticket.
A Minister for Demographics? – Views from a Corporate Bond Fund Manager
What will the world look like in 2100? It sounds an awfully long way away – but then again, our credit portfolios hold bonds that mature after that date. I ask the question in the light of COP26 and the challenges societies face in limiting temperature rises over the long term. The objective of keeping the rise by 2050 to 1.5% above pre-industrial levels looks unlikely given that China is still focusing on a 2060 net zero goal, India is targeting a 2070 net zero deadline and Russia is yet to set a formal goal. However, there have been some wins: greater focus on restoring the world’s forest, more technical and financial support for developing countries, commitments to cut methane, wider recognition of the end for coal-fired power generation and signs that the world’s two economic superpowers are more prepared to co-operate on climate issues.
The transition to a lower carbon economy may be helped by two great trends: innovation and demography. The price of renewable energy is falling dramatically whether it be solar or wind (both on and offshore); the rate of technological improvement suggests this will continue. Coupled with progress on energy storage the outlook looks encouraging. Yes, there will be price shocks when the sun does not shine or the wind does not blow hard enough – but they will get less relevant over time.
The other trend is demography and this is where outcomes are more problematic. The developing world is seeing a massive demographic shift. Where some saw lockdown as likely to rekindle birth rates the opposite has been the case. Shrinking populations in energy hungry societies will be good from a climate perspective and perhaps we are seeing an end to a focus on economic growth as an ultimate goal. But there is another side to the coin. At the present time a fertility rate of 2.1 is required to stabilise the UK population; on current trends this will fall to towards 1.4 by 2023. Later household formations are central here – reflecting housing and childcare costs, greater female employment opportunities, urbanisation, and more State support in old age. Probably climate fears about what the future holds has given a further impetus.
The UK is not alone – or even at the forefront. Countries like Spain and Italy could see their populations half over a century to 2100. The key problem is how governments will finance themselves: we are on a treadmill where growth supports higher living standards, greater government spending and expectations of ever rising prosperity. As growth stalls due to demographic pressures the costs of carbon transition and healthcare will fall on a shrinking base of taxpayers. I think we need a Minister for Demography that sets out the long-term challenges we face as a society. Let’s face it, Covid could look like a blip compared to the demographic trends we face.
COP26 is about how to come up with solutions for climate warming: the focus is strategic and how big shifts can be attained. For politicians in democracies this does not come easily, with horizons set by election dates. Reading about one UK Cabinet Minister apparently lambasting banks for not offering bigger mortgages made me despondent. I really do think we need a Minister for Demographics to get away from short term thinking.
True of False Quiz Answers
- True – based on satellite imagery analysis there are 3.04 trillion trees on earth or 422 for each person alive. It’s estimated that there are 100 billion stars in the Milky Way and the average brain has 100 billion neurons (it does also have a whopping 125 trillion synapses).
- True – the off-limits areas are deemed important for national security and include 5G, artificial intelligence, genetic engineering, and quantum computing.
- False – As a result of COP26 the EU has put all of these products on a potentially banned list if they are made on deforested or degraded lands. This could spell trouble for countries like Brazil, which exports a lot of beef to the bloc.
- True – originated in the 17th Century
- True – also originated in the 17th Century
- False – Certainly having a higher class ticket helps, but women and children holding a 3rd class ticket still had a better chance of survival that a man holding a 1st class ticket:
Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. For information purposes only. The views expressed are the author’s own and do not constitute investment advice.
As always, please do not hesitate to contact one of our Financial Advisers at our Leamington Spa or Coventry offices if you wish to discuss this in further detail.