Government’s Response To Covid Coming Under Scrutiny:

Last week saw the Covid pandemic continue to transform from an economic/health crisis into a political struggle as well. Current Japanese prime minister Yoshihide Suga will face a challenge to his leadership as the ruling Liberal Democrat Party has called for a vote on his leadership. It comes in the face of growing criticism of his government’s handling of the pandemic. Next month also sees parliamentary elections in Germany. Current chancellor Angela Merkel is retiring from politics, so this is not a direct vote on her handling of the crisis. However, her ruling Christian Democrat party is coming under pressure, in part due to the government’s response to Covid.

Elsewhere, the US House of Representatives has pushed through the next phase of Joe Biden’s stimulus and welfare reforms without Republican support. Biden’s handling of the Covid crisis is also likely to be a factor in the mid-term elections next year. If the Democrats lose their slim control of Congress, his hands will be tied for the rest of his term. The urgency with which he is pushing through his reforms is understandable.

Further Signs That Economic Recovery Is Slowing

Last week’s PMI figures show that global recovery has continued to lose momentum as supply constraints begin to bite. UK composite PMI fell to 55.3 from 59.2 in July, its lowest figure in 6 months. Output growth in the services sector fell the most as Covid restrictions, and staff shortages hindered business activity. Manufacturing was more resilient, but it too recorded a decline. Eurozone figures also dropped but at a much lesser degree as the composite PMI fell to 59.5 from 60.2.

Contrary to the UK, services sector growth exceeded manufacturing in the Eurozone despite widespread supply chain delays. The same pattern has been seen in the US as staff shortages, and supply chain delays have caused output to fall. It is important to put this in context. Although output growth is falling, it remains at the high end historically for most developed economies.

On a more positive note, businesses have confirmed that consumer demand has remained strong. The Confederation of British Industry reported similar problems regarding the supply of inventory. However, they also said that manufacturing output growth has remained remarkably robust.

Chinese Containment of Delta Boosts Prices

Commodity prices rallied this week as China got its latest coronavirus outbreak under control, reviving optimism about the level of demand for industrial commodities in the country. The price moves followed a sharp sell-off last week when iron ore suffered its largest single-day drop in a decade. It fell around 35 per cent due to increased fears about the spread of the Delta variant in China, hindering its economic recovery. However, China’s announcement on Monday that it had no new Covid-19 cases for the first time since July sent iron ore prices back up over 9 per cent, and oil prices rose to almost $72 a barrel.

The Delta variant has proven to be the strongest mutation of coronavirus so far. Away from China, cases have continued to surge, particularly in areas with low vaccination rates, and the total number of global cases has doubled in just six months. This has increased investor fears regarding global economic recovery, thus creating a lot of volatility in financial markets overall.

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