14 September 2021
The Office for National Statistics (ONS) said that UK gross domestic product (GDP) grew by just 0.1% in July, according to figures released at the end of last week. The main driving force was production output growth, with the services sector generally flat, and the construction sector lagging for the fourth consecutive month.
Various commentators have noted that increased material costs, staff shortages and the rising COVID-19 Delta variant have all been contributors, with the UK economic recovery still falling 2.1% below its pre-pandemic levels.
According to Azad Zangana, Senior European Economist & Strategist at Schroders, certain sectors could continue to experience sluggish growth in the 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 close a mediocre week for UK equities, during which both the FTSE 100 and FTSE 250 dropped by over 1.5%.
With the exception of Friday’s GDP figures, UK markets battled with a number of challenges. For example, the government revealed plans for a further 1.25% tax on dividends – possibly reducing future returns for income investors.
Last week also witnessed a number of central bank figures indicate that COVID-19 support measures might start to be reduced 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 constitute the Federal Reserve System – announced to the Financial Times that the US central bank should look to start tapering its bond-buying programme by the end of 2021 or during the first half of 2022. On the very same day, Robert Kaplan, President of the Federal Reserve Bank of Dallas, declared that he would seek to push for a tapering as early as October.
The following day, the European Central Bank (ECB) disclosed that it would start 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.”
As part of its pandemic emergency purchase programme (PEPP), the ECB will carry on conducting net asset purchases up to a total of €1,850 billion – at least until the end of March 2022.
In a statement, the ECB remarked:
“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.”
It likewise kept interest rates at the same level. As for the future, Andrew Kenningham, Chief Europe Economist at Capital Economics, said:
“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.”
Amidst so much discussion around putting the brakes on government support, it’s no doubt unsurprising that global markets broadly struggled. The STOXX Europe 600 dropped over 1%, with the majority of the falls happening on Wednesday and Thursday. American markets were on the receiving end of similar falls, with the S&P 500, Nasdaq and Dow Jones all down for the week.
Aside from equities, cryptocurrencies had a particularly difficult week, with severe falls experienced by Bitcoin and Ethereum, which then brought the recent recovery of cryptocurrencies to a grinding halt. In the same week, El Salvador adopted Bitcoin as legal tender.