GDP Growth Slows As Consumer Spending Dries Up:

Last week we saw some of the gloss come off the post-lockdown recovery. Ever since shops and restaurants reopened, a flood of pent-up demand had been driving a recovery in lost revenue. This demand now appears to be spent. Retail sales slowed significantly last month, leading to some very disappointing UK growth numbers. On top of that, the extra juice being supplied by central banks and government spending is also drying up. Last week, the chancellor announced a significant tax hike. This will largely come out of the pockets of people who would otherwise have spent that money locally. Meanwhile, US and European central banks reaffirmed their policy of turning the taps off.

Elsewhere the damage being wrought on global supply chains continues. Covid has left ships and containers scattered far from where they’re needed. On top of this, Hurricane Ida will hit not just oil production but also global chemical supplies. It is difficult to blame shortages on any single effect but freak weather. Covid and Brexit are all pouring sand into the gears of global trade. It looks like it will be a long time before we’ll see normal again.

Bonds Rise As ECB Starts Tapering Bond Purchases

Last week the European Central Bank (ECB) decided to hold interest rates at their record low while moderately slowing its pandemic emergency bond-buying programme from its current pace of €80bn-a-month. This follows a strong rebound in Eurozone growth. It comes as GDP reached 2.2 per cent year-on-year and inflation was estimated at 3 per cent. The growth was largely driven by the increase in Covid vaccinations. These significantly helped end lockdowns and boosted business as well as household activity.

“The lady isn’t tapering” was ECB president Christine Lagarde’s comment on the decision. It was his way of reassuring investors that purchasing fewer bonds is not the first step towards ending bond purchases. Despite this, European government bonds rallied with the 10-year German bond yield. The regional benchmark fell 0.04 per cent to -0.36 per cent, and then the Spanish equivalent falling almost 0.1 per cent to 0.3 per cent. European equities also dropped as the Stoxx 600 fell 1.1 per cent to its lowest level in three weeks.

Weak GDP Growth In July As Consumer Spending Drops

UK GDP growth slowed dramatically as consumer spending dried up. GDP growth averaged just over 1 per cent since February. But, this dropped to 0.1 per cent in July. Spending on travel and hospitality increased sharply as lockdown restrictions were lifted. However, this was more than offset by a contraction in consumer retail spending on food and fuel. Overall, output from the services sector was unchanged from June. Manufacturing output was unchanged from June, and the contraction in the construction sector almost completely cancelled the growth in production of natural resources. Overall GDP remains around 2 per cent below its pre-pandemic levels.

Data out last week also showed a small decline in UK trade, with both exports and imports dropping slightly. This appears to be due to supply bottlenecks and pent up demand being exhausted. Trade in some areas fell back after higher than usual volumes seen earlier this year following the release of lockdown restrictions.

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