Welcome to your weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last week.
US economic growth stagnated in Q3 following the rise in COVID-19 cases
US economic growth slowed considerably in the third quarter following a resurgence in COVID-19 cases, supply chain disruptions and a fall in consumption of goods. At an annualised rate, the US economy grew by 2% in the three months to September, marking the weakest quarter of growth since the recession in early 2020. Compared to the previous quarter, the economy grew by 0.5%. The 2% annualised rate of growth compares to 6.7% in the second quarter of 2021, while also falling short of economists’ expectations at 2.7%.
Underlying the slowdown in growth was a rise in COVID infections which subdued summer spending, while supply chain issues and higher inflation also reduced demand. One example was apparent in spending on long lasting goods, such as autos, which fell by 26.2%. In contrast, spending on services continues to recover.
UK budget cuts debt-financed spending for the next fiscal year as growth prospects improve
Along with the communication of the new fiscal budget last week, UK Chancellor Rishi Sunak announced that government borrowing as a percentage of GDP is set to contract at a faster than expected rate over the next five years. Spending is due to fall from 7.9% in the fiscal year 2021 to 3.3% in the fiscal year 2022, largely as a result of the faster-than-expected economic rebound from the pandemic and the resultant increase in taxation revenue. The Office for Budget Responsibility announced last week that it now expects the economy to regain its pre-COVID level by the end of 2021, upgrading GDP growth from 4.0% to 6.5%.
The cuts to government borrowing mean that the Treasury will issue fewer gilts than originally expected. For the next fiscal year, the Debt Management Office now plans to auction £198.4bn gilts, £57.8bn less than projected in April. In response to the contraction in supply, prices of gilts moved sharply higher, causing yields (which move inversely to price) to contract to the greatest extent since March last year.
Fumio Kishida wins majority in Japanese general election
Japan’s prime minister, Fumio Kishida, declared victory for the ruling Liberal Democratic Party (LDP) in the general election over the weekend, as the party won 261 of the total 465 seats on offer in the Lower House. This exceeds the parliamentary majority total of 233 seats. Fumio Kishida has already been in power for the last two months since his predecessor, Yoshihide Suga, resigned as approval ratings fell sharply in response to the poor handling of the COVID-19 pandemic.
Known as ‘Mr Status Quo’, PM Kishida has been criticised by pundits for his lack of dynamism and charisma. He ran his election campaign on the platform of tackling income and wealth inequality, while also speaking out against the economic doctrine of ‘Abenomics’ that his predecessors committed to. Nevertheless, the Japanese stock market responded positively to the election victory, based on the fact that a parliamentary majority will allow PM Kishida to pursue a large economic stimulus package by the end of November.
Volatility in rates markets remains elevated as central bank behaviour is currently quite difficult to forecast. The Bank of Canada concluded its QE programme earlier than expected and the Reserve Bank of Australia unexpectedly abandoned its Yield Curve Control policy, whilst ECB President Lagarde provided scant pushback against the recent rise in short-term rates (the market now prices 20bp of hikes from the ECB next year).
However, equities proved surprisingly resilient, with the global ACWI index now virtually back at the all-time highs reached in early September, powered by US equities which recorded fresh highs.
Look out for next week’s update, where we’ll be focusing on central bank meetings in the UK and US, as well as the US Jobs report.
All details in this article are provided for information purposes only and should not be misinterpreted as investment advice or taxation advice.
Where the data in this article comes partially from third party sources the accuracy, completeness or correctness of the information contained in this publication is not guaranteed, and third-party data is provided without any warranties of any kind. Sarasin & Partners LLP shall have no liability in connection with third party data.
© 2021 Sarasin & Partners LLP – all rights reserved. This article can only be distributed or reproduced with permission from Sarasin & Partners LLP. Please contact [email protected]