Daily BriefsMacro

Macro: Has COVID-19 Damaged US Labour Supply and Potential GDP Growth? Big Implications for Fed Policy and more

In today’s briefing:

  • Has COVID-19 Damaged US Labour Supply and Potential GDP Growth? Big Implications for Fed Policy
  • Prosperity/ Economy/ Probity/ Equity/ Property
  • UK: RIP Rapid Recovery
  • Europe & The ECB – The Lady
  • Vaccination and Currency Immunity

Has COVID-19 Damaged US Labour Supply and Potential GDP Growth? Big Implications for Fed Policy

By Said Desaque

The weaker-than-expected Employment Situation report for non-farm payrolls in August has raised expectations that the Fed could delay tapering asset purchases, but investors need to discern whether the outcome was due to an underlying slowing in labour demand or merely statistical noise. Estimates for Q3 real GDP growth have been revised down in recent weeks, while labour market data in September will be impacted by people returning to the workforce, thereby providing more time for the Fed to deliberate over the timing of tapering asset purchases.
The Great Lockdown has imparted scars on US labour supply by amplifying the declining working age population via a sharp fall in the participation rate. Elevated measures of job openings and underemployment paint a paradoxical overview of the US labour market, while elevated unemployment in certain demographic cohorts raises questions about the decision to taper asset purchases.
The Fed will assess if slowing employment reflects softening aggregate demand or supply-side damage to the labour market, but elevated job openings suggest the latter, an outcome that implies limited efficacy for monetary policy in dealing with this issue. Labour supply has been impacted by enhanced unemployment insurance benefits, the rise in home schooling due to the pandemic, as well as the prevalence of so-called long COVID.
Continued slowing growth of the workforce will lower potential GDP growth and the required neutral level for the federal funds rate, but the key issue for investors is whether slower growth produces higher inflation. The unwinding of supply chain dislocations is crucial behind the Fed’s transient inflation thesis, but the prospective trend in productivity will be vital in determining whether there is a risk of slower growth being associated with higher inflation.

Prosperity/ Economy/ Probity/ Equity/ Property

By Diana Choyleva

China News That Matters

  • Back to the red roots of revolution
  • Strong exports – and high materials costs 
  • The prudent PBoC 
  • You’re making a tragic mistake 
  • Awaiting Evergrande’s default
  • In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.

UK: RIP Rapid Recovery

By Phil Rush

  • The UK’s rapid recovery phase ended in July with GDP only limping up by 0.1% m-o-m, despite output still languishing 2.4% below the pre-covid level. Only the most depressed sectors even expanded, with most of the economy slipping further from their peaks.
  • It is hard to find an optimistic angle, but seasonal factors may have distorted the recovery profile. We now track Q3 GDP growth at 1.4%, which is below our already gloomy forecast for H2 before any covid-related restrictions return.

Europe & The ECB – The Lady

By Shyam Devani

The delivery of the ECB’s policy stance and guidance this week raises questions about what is going on and which direction it is facing. The choice of words by the President is particularly interesting. 

Vaccination and Currency Immunity

By Olivier Desbarres

In the past couple of months governments in Asia-Pacific have materially accelerated the administration of Covid-19 vaccines.

But because of low starting points, vaccination rates remain low compared to the EU, US and UK and even a number EM economies (including Turkey). The exceptions are Korea, Malaysia and Japan which have now administered a similar number of doses per capita as the US, while Singapore has pulled further ahead.

In countries where governments started to vaccinate early such as the US and in particular the UK, vaccine roll-outs have slowed materially in the past nine weeks. These countries are taking additional measures to encourage those not yet vaccinated to do so and there is talk of jabs for under-18s and of booster jabs at least for the most vulnerable.

The picture for the increase in Covid-19 deaths since early July is even more granular.

In countries where governments started vaccinating early and now have high rates of vaccination, including the UK, US and EU, the number of deaths has perhaps unsurprisingly increased only marginally.

The rate of increase and total number of deaths remain negligible in New Zealand despite a sill modest vaccination roll-out. It has to varying degrees been a similar situation in Australia, Korea, Japan, Singapore and Taiwan.

The increase in deaths has also been modest in India and Philippines, albeit from a higher starting point. The increase in deaths has been far higher in Indonesia, Malaysia and in particular Thailand.  

Vaccination rates are a critical variable from a health and economic perspective but their direct impact on currencies has been mixed.

New Zealand Dollar has outperformed but is not particularly expensive in our view. Going forward we would expect it to remain well supported even if still vulnerable to pull-backs.

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