WeekWatch -‘Gross domestic product (GDP) in the UK grew just 0.1% in July’ September 2021
Gross domestic product (GDP) in the UK grew just 0.1% in July, according to figures released by the Office for National Statistics (ONS) at the end of last week.
Production output growth was the main positive force, with the services sector broadly flat, and the construction sector falling for the fourth month in a row.
Increased material costs, staff shortages and the rising COVID-19 Delta variant have all been mentioned by various commentators as contributors, with the UK economic recovery still lagging 2.1% below its pre-pandemic levels.
According to Azad Zangana, Senior European Economist & Strategist at Schroders, some sectors could continue to see slow growth in coming months: “Overall, this is a poor set of figures, and will prompt forecast downgrades for UK growth. It may be that as concerns eased over the Delta variant, the economy re-accelerated in August, but other fragilities remain.
“The housing market is running on borrowed time, as the Stamp Duty holiday has come to an end. The temporary tax cut brought forward demand, causing house price growth to hit double digits. The Royal Institution of Chartered Surveyors is already warning of a slowdown in prices, which we believe could hurt activity elsewhere over the course of the next year.”
This news helped cap a poor week for UK equities, during which both the FTSE 100 and FTSE 250 fell over 1.5%.
Aside from Friday’s GDP figures, UK markets faced a number of challenges. The government announced plans for an additional 1.25% tax on dividends, potentially reducing future returns for income investors.
Last week also saw a number of central bank figures suggest COVID-19 support measures might start to be eased by the end of the year.
On Wednesday, James Bullard, President of the Federal Reserve Bank of St. Louis – one of the 12 Federal Reserve Banks that make up the Federal Reserve System – told the Financial Times that the US central bank should begin tapering its bond-buying programme by the end of this year or during the first half of next year. On the same day, Robert Kaplan, President of the Federal Reserve Bank of Dallas, said he would look to push for a tapering as early as October.
The following day, the European Central Bank (ECB) announced it would be slowing down the pace of its bond-buying programme, although ECB President Christine Lagarde denied this was the start of a wider bond-purchase tapering, instead declaring, “The lady’s not for tapering.”
Under its pandemic emergency purchase programme (PEPP), the ECB will continue to conduct net asset purchases up to a total of €1,850 billion, until at least the end of March 2022.
In a statement, the ECB noted: “Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council judges that favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the pandemic emergency purchase programme (PEPP) than in the previous two quarters.”
At the same time, it kept interest rates at the same level. Looking ahead, Andrew Kenningham, Chief Europe Economist at Capital Economics, noted: “December is shaping up to be a crucial meeting. Christine Lagarde said the Governing Council had not yet discussed the key long-term questions of when the PEPP will be ended and how the APP will be revised, but she implied that these would be decided in December. At that point the Bank will have its first 2024 forecasts to consider and the earliest possible end-date for the PEPP (March 2022) will be imminent.”
With so much talk of government support slowing down, it is perhaps unsurprising that global markets generally struggled. The STOXX Europe 600 fell over 1%, with the bulk of the falls occurring on Wednesday and Thursday. American markets suffered similar falls, with the S&P 500, Nasdaq and Dow Jones all down for the week.
Looking outside of equities, cryptocurrencies had an especially tough week, with severe falls suffered by Bitcoin and Ethereum, bringing to a halt the recent recovery cryptocurrencies had been going through. This came the same week El Salvador adopted Bitcoin as legal tender.
Schroders is a fund manager for St. James’s Place.
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