LONDON — Britain’s economy grew more slowly than previously thought in the July-September period, before the Omicron variant of the coronavirus posed a further threat to the recovery later in the year, official data showed on Wednesday.
Gross domestic product in the world’s fifth-biggest economy increased by 1.1% in the third quarter, weaker than a preliminary estimate of growth of 1.3%.
That was slower than the economy’s 5.4% bounce-back in the second quarter when many coronavirus restrictions were lifted, the Office for National Statistics said.
Investors are braced for a slowdown in growth in the fourth quarter of 2021 due to a rise in COVI9-cases caused by Omicron which has hurt Britain’s hospitality and leisure sector and hit retailers.
“Our revised figures show UK GDP recovered a little slower in the third quarter, with much weaker performances from health and hairdressers across the quarter, and the energy sector contracting more in September, than we previously estimated,” ONS Director of Economic Statistics Darren Morgan said.
“However, stronger data for 2020 means the economy was closer to pre-pandemic levels in the third quarter,” he said.
The level of GDP was 1.5% below where it was at the end of 2019, revised up from the previous estimate of 2.1% below its pre-pandemic level.
Business investment fell by 2.5% in the third quarter from the previous three months and was nearly 12% below its pre-pandemic level.
The Bank of England is hoping for a revival of business investment to help improve Britain’s longer-term growth prospects.
Britain balance of payments deficit widened to 24.4 billion pounds to as goods exports fell, goods imports grew and foreign companies received more income from their investments in the United Kingdom.
Economists polled by Reuters had expected a smaller deficit of 15.6 billion pounds. (Writing by William Schomberg, editing by Andy Bruce)
The Canadian dollar weakened on Monday to its lowest level in more than two weeks against its U.S. counterpart as investors dumped riskier assets on fears of a Russian attack on Ukraine.
The loonie was trading 0.5% lower at 1.2650 to the greenback, or 79.05 U.S. cents, after touching its weakest level since Jan. 7 at 1.2701.
“While risk-off price action has been abundant today due to geopolitical factors, it took the nosedive in U.S. equity markets to trigger a fresh wave of risk aversion in markets,” said Simon Harvey, head of FX analysis for Monex Europe and Monex Canada.
Wall Street plunged in a broad-based sell-off as the geopolitical risk added to investor worries about aggressive policy tightening by the Federal Reserve.
Canada is a major producer of commodities, including oil, so the loonie tends to be sensitive to moves in risk appetite.
U.S. crude prices settled 2.2% lower at $83.31 a barrel, while the safe-haven U.S. dollar gained ground against a basket of major currencies.
The shift in positioning comes ahead of a potential interest rate hike by the Bank of Canada at a policy announcement on Wednesday. Money markets see about a 65% chance of a hike but expectations have dipped from 70% on Friday.
Investors are coming to the view that expected multiple interest rate hikes this year by the Bank of Canada will bring price pressures under control, albeit at a cost of slower economic growth.
Canadian government bond yields were lower across the curve. The 10-year eased 3.1 basis points to 1.761%, extending its pullback from the highest level in nearly three years last Wednesday at 1.905%.
(Reporting by Fergal Smith; Editing by Mark Heinrich and Nick Zieminski)
Mark Zandi is chief economist of Moody’s Analytics. The opinions expressed in this commentary are his own.
The pandemic continues to call the shots for the economy. Each wave of the virus has done significant damage, with Omicron now hitting the economy hard. December retail sales slumped as households pulled back on spending, including travel, dining out at restaurants and attending Broadway shows. The airlines continue to struggle with flight cancellations as pilots and other personnel get sick. Unemployment insurance claims are on the rise again, as small businesses, unable to stay open, reduce staff.
At Moody’s Analytics, we have revised down our forecast for real GDP growth in the first quarter from about 5% annualized to less than 2%. And GDP could easily decline further if Omicron infections don’t subside substantially in the next few weeks.
Despite the sobering pandemic news, global investors are upbeat, even giddy. Asset prices are surging. Stock prices rose nearly 30% last year and national home values were up by almost 20%. Reflecting these price gains and the increase in household savings, the value of all assets (excluding crypto) owned by US households increased by a stunning $22 trillion in 2021. This translates into a 16.8% gain, the strongest on record and more than double the average annual increase.
To be sure, asset prices should be high given record low interest rates. Low interest rates increase the present value of future corporate profits, rents and other income.
But prices appear stretched well beyond what can be explained by low rates. According to my own estimate, the ratio of the value of assets owned by households to GDP rose to 7.5 times at the end of last year. Prior to the pandemic, this multiple was close to 6 times. Other tried-and-true measures of asset price valuations, such as stock price multiples, corporate bond credit spreads and commercial real estate capitalization rates are also well outside historical bounds.
Now markets appear to be bordering on speculative, with more investors purchasing assets with the intent of selling quickly for a profit. So-called meme stocks, SPACs and the wave of initial public offerings, particularly of high-flying technology companies, are such signs in the stock market. In the housing market, it is the recent spike in the share of home sales by investors. Investor purchases have almost doubled over the past year, and suddenly account for one-fourth of home sales. Meanwhile, sales to individual buyers are actually down a bit.
And the crypto markets appear to be almost completely dominated by speculators. They’ve been mesmerized by the exponential increase in prices and believe there will be other investors to buy their crypto at a much higher price than they paid. It’s the greater fool theory at work — prices go up because people are able to sell their crypto to a greater fool. That is, of course, until there are no greater fools left.
Asset prices are thus highly vulnerable to a selloff, and the catalyst may well be the pending shifts in monetary policy. If things hold together as anticipated, the Federal Reserve will wind down its quantitative easing by this spring and begin to lift the federal funds rate off the zero lower bound soon thereafter. Interest rates are headed higher — it is only a question of how high and how fast. It is hard to fathom how asset valuations can remain as lofty as they are, even with only a modest increase in rates.
If asset markets sold off today, the decline in prices is unlikely to be deep and persistent enough to undermine the economic recovery. The resulting negative wealth effects — the impact of changes in wealth on consumer spending — would likely be modest, since the runup of wealth during the pandemic doesn’t appear to have had much — if any — impact on household saving and spending. Rising wealth in times past has made households more confident, leading to less saving and more spending. It is difficult to disentangle things, but this has not happened during the pandemic.
Moreover, households have not overly borrowed to finance their asset purchases. While margin debt, which is used to finance stock purchases, and mortgage debt have recently begun to increase quickly, it is still premature to send off red flares.
Having said this, this sanguine perspective will not hold much longer if asset prices continue to climb, and leverage continues to build at the pace of the past year. The economy has become prone to asset bubbles. There was the dot-com stock market bubble in 2000 and the housing bubble of the mid-2000s. When these bubbles ultimately deflated, they did significant damage to the economy. It is premature to think that we are in the next asset bubble, but it is not premature to worry that one is forming.
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The European Union has a lot more to lose than the U.S. from conflict with Russia, one reason why the western allies are having difficulty agreeing on a tough stance in the standoff over Ukraine.
Russia ranks as the EU’s fifth-biggest trade partner — as well as its top energy supplier — while for the U.S. it barely makes the top 30. There’s a similar gap for investment, with Russia drawing in money from Europe’s household names including Ikea, Royal Dutch Shell Plc and Volkswagen AG.
With inflation surging and consumers squeezed by a surge in energy prices, EU officials are moving carefully on the prospect of sanctions. They want Russia to feel more pain than Europe from measures aimed at preventing an invasion of Ukraine. They’re worried a war could choke off natural gas supplies in the middle of winter when they’re needed most.
All those issues may feature in a call between U.S. President Joe Biden and his European counterparts scheduled for Monday in a bid to strike a unified position.
Adding to Europe’s reluctance is a sense that for penalties imposed on Russia in the past, especially after the 2014 invasion of Crimea, it was the EU economies and not the U.S. that paid the price. As U.S. President Joe Biden warns that Russia’s military may move shortly, EU leaders such as France’s Emmanuel Macron are playing for time. Russia maintains it has no plans to invade Ukraine.
“Sanctions have the best effect if they are efficient,” German Foreign Affairs Minister Annalena Baerbock said last week. “It’s about sanction which really have an effect, not against oneself, but rather against Russia.”
By contrast, Russia is “well prepared” to weather any sanctions after taking steps to insulate itself from measures the U.S. might impose, said Viktor Szabo, fund manager at Aberdeen Asset Management in London.
“It will be difficult to inflict such a pain that would be felt,” Szabo said. “It wouldn’t push Russia to the edge.”
What Bloomberg Economics Says…
“Europe stands alone when it comes to how much more consumers will have to pay for natural gas. Our in-house model of the eurozone economy points to a hit from higher energy prices of as much as 1% of GDP, with the impact lasting well into this year.”
–Jamie Rush, chief European economist. Click for the INSIGHT.
Energy is the biggest friction point. The U.S. is a net energy exporter, but the EU relies on imports, and Russia is its No. 1 supplier of both oil and natural gas.
JPMorgan Chase & Co. economists on Friday warned a surge in the price of oil to $150 a barrel would hammer growth and spur inflation.
Gas is a particularly sensitive matter now, with Russia holding back supplies for the past few months. Prices have tripled, boosting the cost of electricity across the continent. It’s the main reason Europe is suffering a bigger energy shock than the U.S.
Escalation with Russia over Ukraine could make it worse. EU officials are caught in a bind, since domestic gas production is in decline while Russia has built facilities to supply more.
Russia’s gas exporter Gazprom PJSC and partners including Shell have spent 9.5 billion euros ($10.8 billion) completing the Nord Stream 2 pipeline and want to open it. Military action in Ukraine would put that on the chopping board — and any future deals to boost Russian supply to the region. That would exacerbate the energy shortage in the EU.
“Were sanctions to be placed on Russia’s energy exports or were Russia to use gas exports as a tool for leverage, European natural gas prices would probably soar,” said Capital Economics analyst William Jackson. “We think they would far exceed the peak reached last year.”
Sanctions against Russia would also benefit U.S. exporters who are seeking to ship more liquefied natural gas into Europe.
ING Bank Eurasia’s Chief Economist Dmitry Dolgin says the U.S. and its allies could hit Russia with:
Sanctions on non-military technologies, or blocking access to foreign financing for companiesA ban on Western funds buying state-issued debt, costing Russia $10 billion a yearA retroactive ban on foreign participation in local state debts, costing $60 billionHalting access to the Swift payment system, which would make it much more difficult for Russia to collect payments on $535 billion of exports a year
Europe’s businesses have more at stake because they’ve invested more in Russia than their U.S. counterparts — and the gap has widened in recent years. Russia is also one of the biggest exporters of aluminum, nickel, steel and fertilizers.
Ikea, Volkswagen and the brewer Carlsberg A/S operate in Russia. Italy’s UniCredit SpA has been eyeing an acquisition there that would make it the biggest foreign bank in the country — overtaking Societe Generale and Austria’s Raiffeisen.
Europe also has been stung hard by past sanctions aimed at Russia. After Russia annexed Crimea in 2014, the U.S. and EU agreed on a sanctions regime.
Three years later, a study by the Kiel Institute for the World Economy found that while Russia suffered the biggest trade losses, Germany wasn’t all that far behind. Other EU economies got hit too. The U.S. actually came out ahead. A similar pattern followed sanctions on Iran.
Politicians in the U.S. and Europe boast about the economic pain they’re capable of inflicting on Russia. They’ve kept quiet about the “inconvenient truth” that there’ll be consequences at home too, according to Tom Keatinge, head of the Centre for Financial Crime and Security Studies at the Royal United Services Institute in London.
“Sanctions issued by Western countries rarely include the need to accept any meaningful self-harm,” Keatinge wrote last month. “The impact on the economies of the issuers — particularly in the EU — may be significant.”
Bloomberg Economics research …
How Putin Could Embolden ECB’s Hawks What the Energy Crunch Means for IndustryHow Putin Could Embolden ECB’s Hawks
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