- Economies continued to recover from the pandemic at different rates around the world, with infection rates rising in some regions
- Stock markets in Europe and the US led the way, while Asia and the emerging markets struggled
- Inflation in the UK increased to 2.5%, its highest level since 2018
Since the start of May, there has been growing divergence between the economic fortunes of countries around the world. The US and South Korea are already reaching pre-pandemic levels of economic activity, while the Organisation for Economic Co-operation and Development (OECD) expects Europe’s recovery will take another year and a half. In the UK, the OECD predicts unemployment will not return to pre-pandemic levels until the end of 2023.
Stock markets are also following a path determined by the pandemic. US markets have hit new highs as the economy there has re-opened, backed by support from the Federal Reserve, while markets in Asia particularly are experiencing renewed pressure from fresh outbreaks.
Economic update
The UK economy continued to see improvement over the past few months as business activity returned after lockdown restrictions were lifted. The EY Item Club, which is an independent economic forecasting group based in the UK, estimated that, by the end of July, the UK economy was growing at its fastest pace for 80 years and gross domestic product would grow by 7.6% for 2021. A key driver of this was the fastest vaccine rollout of the G20 (tied with Canada), which helped to drive consumer spending and manufacturing activity. Nevertheless, there was a slight slowdown in activity in July as shortages of staff and materials took their toll, potentially threatening the recovery.
As economic growth has ramped up, so too has inflation. The UK inflation rate has been rising steadily since CPI hit a low of 0.7% in February and reached 2.5% in June, significantly above the Bank of England’s 2% target. The central bank predicts that inflation will exceed 3% this year, but has held off raising interest rates because it believes this will be a short-term trend.
In Europe, vaccination rates have risen after a slow start and have surpassed the US, but it continues to lag the UK’s rate. Economic activity improved greatly over the past three months, with business activity reaching a 21-year high in July. Despite reaching a two-year high of 2% in May, Europe’s inflation rate fell back to 1.9% in June, and as a result the European Central Bank did not make any changes to interest rates.
Turning to the US, the economy was strong once again and is widely expected to record GDP growth of 9.2% for the April to June period. This would make it the strongest three-month period since the same period in 1983. Strong consumer spending has been a major driver of rising business activity in the US, owing to the rapid rollout of vaccines and President Joe Biden’s $1.9 trillion financial assistance package.
China was the earliest major economy to experience a strong recovery, but there is evidence that it is losing momentum. GDP growth in the April to June period slowed down to 7.9% after hitting 18.3% in the January to March period. Meanwhile, the country’s manufacturing and services sectors began to slow down throughout the past three months, hampered by resurgent COVID-19 infections, a global computer chip shortage and higher material costs.
Market commentary
Financial markets around the world continued to be influenced by the COVID-19 pandemic, the pace of vaccination rollouts around the world and the re-opening of economies. The European and US stock markets led the way with solid returns, followed by the UK. Asia Pacific and the emerging markets struggled. This was due in part to rising COVID-19 infection rates, but also because of the Chinese government’s regulatory crackdown on technology companies in late July.
In bond markets, yields on government bonds, which move in the opposite direction of bond prices, fell during the past three months despite ongoing concerns about rising inflation. Central banks typically raise interest rates during periods of higher inflation in an attempt to cool down the economy and keep rising prices in check. At present both the Bank of England and US Federal Reserve have decided to allow inflation to rise above their targets as they believe it will be short-lived due to the economic recovery.
