UK economy springs post-Covid surprise

After a number of setbacks, and with the furlough scheme ending today, economic growth was better than expected in the second quarter.

Markets staged a tentative rebound after the sharp declines of the previous day, although technology stocks remained under some pressure as investors sought alternative destinations.

There was an element of capital conservation as investors switched to more defensive holdings, with sentiment still fragile. Comments from the Federal Reserve that the persistence of supply chain problems could keep inflation elevated for longer appeared to assuage investors who had been fearing that the impending taper would be brought forward.

Although not yet fully front and centre for investors, the usual political grandstanding which surrounds the debate on extending the government’s borrowing authority, led Treasury Secretary Janet Yellen to warn of the serious consequences of a US credit default. While the possibility of that outcome currently remains low in the eyes of most market participants, any deterioration in the ongoing talks would inevitably harm sentiment.

Despite a relatively brittle backdrop, the main US indices remain healthily ahead in the year to date, with the Dow Jones having risen by 12.4%, the S&P500 16% and the Nasdaq 12.6%.

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In the UK, growth in the second quarter was revised upwards from a previous 4.8% to 5.5%. Health services and the arts were cited as major drivers for the improved figure. At the same time, a sharp decline in the household savings ratio implies that emancipated Brits chose to embark on a spending spree after restrictions were lifted.

GDP is now just 3.3% shy of pre-pandemic levels, and far healthier than the near-20% decline seen as the initial lockdown was introduced in March 2020.

Meanwhile, the immediate test for the UK economy now comes in the form of the winding down of the furlough scheme and the stamp duty holiday. In terms of the former, it remains unclear whether the expected spike in unemployment will come to pass, given the currently high levels of job availability as evidenced by shortages in various sectors.

The recent economic challenges resulting from supply chain blockages have weighed on sterling, exacerbated by US dollar strength as some investors have sought haven investments. This in turn has boosted the FTSE100, largely reliant as it is on overseas earnings, whereby overseas earnings become more valuable on sterling weakness. 

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In the year to date, the premier index is now ahead by 10%, while the more domestically focused FTSE250 has taken the brunt of the more recent UK concerns, although even after the recent dips the index remains up by 13%.