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How to protect the NHS...and the economy

Weekly update
  • Weekly market update
  • 5 minute read

A good week for

  • Gold, which regained c. 2% in US dollar terms
  • US equities, which were the best performing equity region in sterling terms

A bad week for

  • Bonds, which weakened across the board
  • UK and Japanese equities, which also declined modestly

UK health policy

Health service leaders warned that the NHS faces a challenging winter and urged Number 10 to prepare and implement measures to alleviate any pressure it might come
under. One in five ICU beds in UK hospitals is occupied by coronavirus patients, and the number of non-Covid emergencies has also risen, making it challenging to tackle
the backlog of non-urgent surgeries. NHS representatives have urged the government to move to “Plan B”, encouraging people to work from home, introducing health passports for large events and requiring face coverings in crowed and enclosed spaces. While a worsening health situation could weigh on consumption - diminishing consumer confidence and requiring curbs on some sectors - the proposed measures are designed to have minimal economic impact.

Chinese economy

China’s economy grew by 4.9% year on year in the third quarter of 2021. The 0.2% quarter on quarter increase was the lowest on record, leading investors to question whether China’s growth will slow permanently. China’s economy faced a number of headwinds in the third quarter. Renewed outbreaks of coronavirus resulted in stringent social restrictions being reintroduced in a number of districts, weighing on consumption and industrial production. Electricity shortages also weighed on output, while new financial stability regulations impacted the real estate sector. China has ramped up domestic coal production in order to boost electricity generation, but it will take time to replenish inventories and ease prices. Meanwhile, regulatory tightening is expected continue, though Beijing is acting to support the financial and real estate sectors. As the world’s second largest economy, China is a powerful driver of global growth, and moderation in China’s economy could translate to weaker growth elsewhere.

UK inflation

UK inflation weakened in September, edging down to 3.1%. However, the decline was likely a one-off, reflecting anniversary effects a year on from the end of the Eat Out to Help Out scheme. Looking forward, inflation is likely to rise into next year, pushed up by higher oil prices, Ofgem price increases in October 2021 and April 2022, and the two-stage rise in VAT. In response to price rises, inflation expectations have risen somewhat in recent weeks. The Bank of England has been sending a more hawkish message to markets, signalling a readiness to raise rates before the end of the Quantitative Easing programme in December. This has caused the market to begin pricing in a hiking cycle. However, the path for wage growth - which will be a key factor in terms of longer term inflation outcomes - remains unclear, as ex-furloughed workers and the economically inactive provide potential for hidden slack.

US industry

US industrial production declined in September, falling -1.3%. The sharp fall was exacerbated by severe weather, as Storm Uri hit Texan output, while Hurricane Ida disrupted mining activity. Looking beyond weather effects, the semiconductor shortage continues to weigh on auto production, and supply chain problems and labour shortages may persist into 2022.

UK consumer confidence

Consumer confidence weakened in October, with the GfK consumer confidence index falling to -17. The indicator has weakened steadily since the summer, with survey participants broadly more negative. Respondents were pessimistic about the UK economy in the year to come, and even about their personal financial situation, considering it a less favourable environment for a major purchase. Higher coronavirus cases, the withdrawal of fiscal support, supply chain disruption and cost increases may all have weighed on sentiment. However, if unemployment remains low into next year and wage growth offsets inflation, consumer confidence may recover, boosting consumption and borrowing.

 

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