Welcome to your weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last week.
US first quarter economic growth better than expected
The US economy grew at an annual rate of 6.4% in the first quarter of 2021, up from a 4.3% expansion in the previous quarter and marginally better than economists expected. The increase signals US output is close to pre-pandemic levels, boosted by substantial fiscal spending and the relaxing of lockdown restrictions.
Above all this data point supports the consensus that the US economy is set for a robust economic recovery this year, something which has been indicated by a slew of recent economic data. The concern thereafter turns to US inflation and whether growth turns into higher prices and an eventual tightening of monetary policy, which would be a significant headwind for financial assets.
To this final point, Chairman of the US Fed, Jerome Powell, struck a familiar note of caution in his comments last week highlighting that, “substantial further progress” was needed before the FOMC considered tightening, although he did concede that economic data was improving.
Tighter COVID-19 restrictions lead Europe into a double-dip recession
The aggregate Eurozone economy shrank by 0.6% over the first quarter of 2021, as a resurgence in COVID-19 cases lead to a tightening of restrictions across the continent. This leaves the economy 5.5% smaller than its pre-pandemic level.
Within the bloc, France was the only major economy to avoid contraction, as higher than expected investment spending and household consumption resulted in marginal growth (+0.4% QoQ). Italy, Spain, and Germany all contracted.
Europe’s difficulties in procuring sufficient vaccine supplies has led to a slower rollout relative to the US and UK and that’s causing a short-term divergence in activity levels. However, Europe’s vaccination rate improved significantly in the last month with 26.5% of adults having had at least one dose (as of 28/04/2021). The improving outlook has generally been a positive for European assets and the Euro.
Markets
Equity markets were broadly flat last week. There was a slight recovery in Indian equities despite the ongoing humanitarian disaster and record COVID-19 cases. The oil price was the big mover over the week, recovering nearly 4% on hopes that the cyclical rebound will translate into higher energy demand.
For April overall, asset returns were generally positive for investors; global equities rose by 4.4% (as measured by the MSCI All Countries World Index), fixed income securities regained lost ground from the first quarter and the gold price rose for the first time since December 2020. Economic momentum continues to improve in the US, while the outlook is more nuanced in Europe and the UK although still positive. The focus for markets remains on US inflation and forward guidance from the Federal Reserve – indications of excessive price inflation and / or tightening of monetary policy would both be taken as significant warning signs for investors.
Look out for next week’s update, where we’ll be focusing on the US jobs report and money supply data from China.
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