As COVID-19 Pandemic Exits, Economic Headwinds Escalate
On Thursday, September 29, the US will release annualized GDP results for the second quarter. The world’s largest economy is in a technical recession and the most recent Durable Goods Orders data for August remained in negative territory at minus 0.2 percent. Second-quarter GDP is expected to be minus 0.6 percent on an annualized basis and if the actual results are better or worse than expected, the USD currency pairs could move.
High inflation rates are the main culprit, triggering hawkish monetary policies from the US central bank and dampening investor sentiment and investment levels judging by the recent sell-off in global stock markets. While it’s natural that prices would speed up relative to the COVID-19 period between 2020 and the beginning of 2022, this is of little consolation to monetary policy makers staring at inflation rates far higher than the target of 2 percent. Nor does it help consumers faced with high prices and rising interest rate repayments on their mortgages.
A strong US Dollar does support spending power for US travelers and purchasing managers buying raw materials from foreign countries, but it also dampens exports which are more expensive because of the exchange rate.
In Europe, there are similarities in the sense that inflation rates are high, but the situation differs because the EUR is at multi-decade lows at the time of writing. This weighs heavily on consumer spending power but is supportive of Eurozone exports because of exchange rates.
The UK’s economy faces considerable headwinds, not least of which is a weak currency and high inflation.
The bright spot for all three economies is employment which remains resilient, supporting the recovery from COVID-19 recessions and uncertainties.
The world’s second-largest economy, China, is set to start revving up its economic engines and we’re watching the Purchasing Managers Index (PMI) results for September due out on Friday the 30th. The Non-Manufacturing PMI is seen at 52 compared to 52.6 in August - still in growth territory. The NBS Manufacturing PMI is expected to have trimmed from 49.4 in August to 49.2 in September.
Once China’s economy picks up, this is likely to support the Asian giant’s trading partners in the UK, US and EU, potentially stabilizing the global economy enough to weather the headwinds.
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