How Long Is Transitory?

The Bank of England meeting on June 24th finishes this round of major central bank meetings.  At its last meeting, Bailey & Co reduced the weekly bond-buying.  The extension of social restrictions well into July provides added reason to be cautious, though economic activity is accelerating and consumer prices are rising faster than the medium-term target of 2% for the first time in three years.   

British growth is likely peaking this quarter, perhaps a little above 4%. It would put H1 21 growth around 2.6%.  The pace of activity is likely to slow to around 2% in H2.  Growth in H1 22 may be closer to 1.5%.  Return to normalcy, indeed!

The same can roughly be said about the US as well.  The quarterly pace and the year-over-year increase are expected to peak here in Q2 21 also.  Both the Atlanta and St.Loius Fed tracking GDP models see Q2 GDP at a little more than a 9% annualized rate.  The slowing, however, will be moderated by the mid-July start of two new initiatives designed to help lower and middle-class families: the Child Tax Credit (~36 mln families qualify) and the Earned Income Tax Credit that will run at least through December. As a result, above 3% growth may be achievable into early 2022, but by H2 22 and the mid-term election, growth is likely to return to the status quo ante below 3%.  

The preliminary June PMI reports are the data highlight of the week. They may pose some headline risk, but in the reaction function of policymakers and private decision-makers, the news will be of little consequence, confirming what is already known. The vaccinations are making possible the gradual and uneven social and economic re-opening.   Low interest rates, the fiscal stimulus of various stripes, and rebuilt savings appear to provide a friendly environment for robust economic activity.  The PMI is a useful snapshot of this process.  

Japan is the only G7 country where the composite PMI is below the 50 boom/bust level (48.8 in May). Tokyo and several other prefectures' formal state of emergencies are set to lift on June 20, but reports suggest lighter restrictions may be imposed ahead of the start of the Olympics and Paralympics. Holding the games during Covid was terribly unpopular in Japan, though public opinion appears to have softened a little. Nevertheless, the G7 statement recognized the importance of  holding the event safely and securely "as a symbol of global unity in overcoming Covid-19."  

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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