The latest economic releases in terms of both survey and hard data in most developed countries over the past few months suggest that the pace of economic recovery has started to slow. The manufacturing Purchasing Managers’ Indexes (PMIs) which gauge the prevailing direction of economic trends in the manufacturing sector, have come off their highs, consumer confidence has dipped, and business surveys have eased a little. Moreover, the rebound in consumer spending appears to have slowed in the US and the UK, the recovery in Germany is taking longer than anticipated and data from China suggests that growth is already slowing there. Meanwhile, the August payroll report coming out of the US last Friday, provided a massive miss with only 235,000 jobs added compared to expectations of 720,000. This was to some extent inevitable given that the rapid rebounds experienced earlier this year has left most economies either at or close to their pre-pandemic levels of output. However, the spread of the highly-infectious Delta variant has also weighed on activity, particularly in Asia, where governments have re-imposed restrictions on movement in an effort to uphold a zero COVID strategy. Moreover, there is growing evidence that supply constraints are also holding back recoveries in some sectors.

While the data on activity and output have surprised to the downside, the data on inflation has generally surprised on the upside. Inflation is now running above target in both the US and the euro-zone, and is likely to breach its target again in the UK over the coming months. Meanwhile, consumer price inflation in China has edged lower but producer price inflation remains elevated.

Most of the increase in inflation can still be attributed to the effects of the pandemic that are likely to be temporary in nature. This includes a sharp rebound in global commodity prices, but also increases in the prices of everything from used cars to airline tickets and restaurant meals.

The good news is that the latest data from the US and out of Asia seem to show that the worst of the cost-push inflationary pressures is behind us. Shipping costs are elevated and firms continue to face higher input costs, but global shipping volumes have edged down, consumer spending keeps rotating away from goods, and some commodity prices, such as lumber, oil and precious metals, are falling.

Fed Chair Powell signaled at his speech at the Jackson Hole symposium that the Federal Open Market Committee (FOMC) is likely to begin tapering asset purchases this year, but the pace at which policy support is withdrawn will be extremely gradual and that interest rate hikes remain some way off. More recently, some members of the European Central Bank’s (ECB) governing council have also begun discussing the possibility that it may start to taper asset purchases, but the speed at which it moves is likely to be even slower than the Fed. Meanwhile, the situation in Emerging Markets is a bit different, with central banks remaining more sensitive to higher inflation and policymakers from Brazil to Russia tightening by more than the market has expected in recent months.

Nonetheless, the main message from the major central banks in advanced economies over the past few months has been that, tapering apart, they are likely to keep policy settings extremely loose for the foreseeable future.

Disclaimer: This article was written by Stephen Borg, Head of Private Clients at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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