The August non-farm payroll report issued by the Bureau of Labour Statistics was the latest in a series of data releases to suggest that there has been an acute slowing of economic growth in the third quarter. Unlike in the UK, the US vaccination program seems to be less effective at breaking the link between new COVID-19 infections and hospitalisations, with unemployment falling slower than expected. While the slowdown initially reflected the fading of fiscal stimulus, we are now looking at other factors weighing on growth, and the extent of their impact.
Despite the spike in cases, Western authorities are showing little to no appetite for reimposing restrictions on public activity. The reopening of restaurants and retail stores has been vital to the rebound of economies globally, and although governments are facing renewed fears of higher transmission rates from the Delta variant of the virus through high-contact service activities, the consensus is notably less fearful than during earlier phases of the outbreak. This was reinforced this week by Boris Johnson as he was at pain to point out a lockdown was absolutely the last resort over the winter.
Recovery in service and travel sectors is now levelling off, as opposed to going into reverse, which should not be overly surprising considering spending output has already surpassed its pre-pandemic peak in real terms. Assuming that the rise in new cases will begin to taper off over the next few weeks, and activity remains unrestricted, then the hit to demand will be more modest than in previous waves and markets can continue to make good ground.
As I wrote last week, if supply side shortages continue then global manufacturing will slow, limiting growth for several more months to come, leading to upward pressure on prices and a reduction in real income. Though there are now a wide variety of goods in short supply, semiconductors remain the key input to production for which supply has failed to meet demand. The disrupted supply has been exacerbated by a surge in demand where economies have remained open in the face of infection. Furthermore, the scarcity in Heavy Goods Vehicle (HGV) drivers owing to shortage of labour is contributing to a further hike in prices.
However, there is light at the end of the tunnel. Much of the recent supply disruption will likely fade over the coming months and into 2022, especially those owing to the extreme weather conditions we have seen in Brazil with drought and then the flooding in China. Furthermore, much of the increased demand for goods such as electronics should decrease as service sectors in advanced economies reopen, and the pattern of goods consumption starts to normalise. This should reduce the strain on the supply of semiconductors, aided by the re-opening of factories in Southeast Asia, where falling cases will allow the loosening of quarantine restrictions.
While it is reasonable to think we are closer to the end of the ‘COVID Crisis’ than the beginning, the spread of the Delta variant continues to cause concern. Thus far however, it looks as though this wave has been better dealt with than preceding outbreaks. Previously, we faced major lockdowns leaving economies at a standstill, whereas now there is little political will to reimpose these restrictions if not deemed absolutely necessary. It has been a relatively stable summer for investment markets and we see plenty of opportunities in front of us for the fourth quarter. Have a lovely weekend.