Is the recovery running out of steam?

29th June, 2021

Initially, the recovery appeared to be going very well indeed. Economic growth was rising, retail sales were climbing, unemployment was contained at manageable levels. The IMF and OECD revised growth expectations higher. More recently, however, there have been some less promising signs – inflation is rising, jobs growth is slower and now, retail sales figures have disappointed.

The most recent US retail sales figures show a decline of 1.3% month on month. This was weaker than consensus expectations of a 0.7% decline. Admittedly, this is still 24.4% than a year ago, but given that the world economy was fully locked down in May 2020, this figure needs to be taken with a pinch of salt.

There had been high expectations that consumer demand would pick up the slack on recovery. Economists believe there is significant pent-up spending ready to be unleashed, including stimulus cheques. As such, any weakness is worrying for the strength of the recovery, particularly at a time when inflation appears to be rising rapidly.

That said, there are a number of nuances here. Daniel Casali, chief investment strategist at Smith & Williamson, says that this retail sales data primarily reflects the consumption of goods: “Given an opening up from lockdowns, money can be expected to be spent on services (e.g. on leisure and hospitality), potentially at the expense of goods.”

He believes that the outlook for overall consumer demand remains healthy. The labour market is recovering, albeit at a slower pace than some had expected. “Despite ongoing uncertainty from Covid-19, there are currently 9.2 million openings (32% higher than their pre-pandemic level), suggesting plenty of hiring opportunities are being generated by the economy. This combination of employment, as well as rising wage gains and longer hours worked, lifts labour income and spending.”

Personal savings are still high and stimulus cheques have not all been spent. Consumer purchasing power is still rising, suggesting that consumers have the finances to raise their current rate of spending.

A final consideration is that the data during this period was always likely to be lumpy. The economic shock created by the pandemic has no real precedent and neither does the recovery from it. There are bottlenecks, structural changes in employment patterns, technological changes, all of which may not be built into analysts’ forecasts. Investors shouldn’t conclude that the recovery is losing steam just yet.

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