United Kingdom

Growth was seemingly solid in Q1, as the progressive removal of virtually all Covid-19 restrictions supported the services sector. The economy clocked back-to-back monthly growth in January and February, while the labor market strengthened in Q1, with job vacancies at a record high and brisk employment growth in the quarter as a whole. Less positively, surging domestic inflation and a darkening international panorama are dragging on activity heading into Q2. In April, the Composite PMI dropped, and consumer sentiment tumbled to an over-decade low, boding poorly for private spending. The measures taken so far by the government— including a fuel duty cut and tax rebates—are insufficient to offset the hit to households’ purchasing power from higher inflation. In politics, Prime Minister Boris Johnson was recently fined over breaking lockdown rules. However, he is likely to remain in his post.

This year, growth will slow substantially due to intense inflation and tighter monetary policy. Protracted conflict in Ukraine and further Covid-19 variants pose downside risks, while possible further fiscal support is an upside risk. While trade tensions with the EU—particularly over Northern Ireland—have taken a backseat due to the war, they still cloud the outlook. FocusEconomics panelists expect the economy to expand 3.8% in 2022, which is down 0.2 percentage points from last month’s forecast, and 1.7% in 2023. 

Inflation increased to 7.0% in March, above February’s 6.2% and the Bank of England’s 2.0% target, and higher than market expectations. March’s result was the highest inflation rate since March 1992. Looking forward, inflation is set to rise further in the coming months due to the large re-rating of the energy price cap from April, as well as high energy and food prices. FocusEconomics Consensus Forecast panelists expect inflation to average 7.1% in 2022, which is up 0.8 percentage points from last month’s forecast, and 3.5% in 2023. 

On 17 March, the Bank of England (BoE) increased the bank rate from 0.50% to 0.75%, marking the third successive rate hike. The Bank’s decision was driven by the desire to rein in surging inflation. While the Bank’s forward guidance was more dovish than at the previous meeting, further rate hikes are still expected later this year in order to quell inflation. FocusEconomics Consensus Forecast panelists see the bank rate ending 2022 at 1.32% and 2023 at 1.63%. 

The pound traded at USD 1.26 per GBP on 29 April, depreciating 4.4% month on month, amid concerns over global growth and expectations of aggressive Fed tightening. Our panelists see the pound strengthening slightly against the dollar by the end of this year, although the hawkish Fed and tensions with the EU continue to pose downside risks. The Consensus is for the pound to end 2022 at USD 1.34 per GBP and 2023 at USD 1.38 per GBP.

United States

The economy contracted slightly in Q1 according to preliminary data. Declines in federal, state and local government spending were partly to blame, with federal spending dampened by the winding-down of government support programs and lower defense expenditure. Lower private inventory investment and booming imports also weighed on the GDP reading. However, underlying dynamics were more encouraging: A red-hot labor market kept consumer spending growing briskly despite surging inflation and Omicron infections, while fixed investment growth sped up. Turning to the second quarter, GDP is expected to bounce back as the contribution of net trade improves. However, domestic demand is likely easing amid skyrocketing inflation and higher interest rates. Indeed, the S&P Global Composite PMI dipped to a three-month low in April on a softer services sector. Consumer confidence also ticked down in the month. 

Growth is projected to slow in 2022 due to surging inflation and much tighter monetary policy. That said, low unemployment should support private consumption, investment should stay fairly healthy, and the energy sector will be boosted by the Ukraine war. Uncertainty over new Covid-19 variants, an intensification of the war, and tensions with China are risks. FocusEconomics panelists see GDP growing 3.2% in 2022, which is down 0.2 percentage points from the previous month’s forecast. In 2023, our panel sees the economy expanding 2.2%. 

Inflation rose to 8.6% in March from February’s 7.9%, marking the highest reading in decades and way beyond the Fed’s 2.0% target. Price pressures in recent months have been spurred by tight labor market conditions and pricier food and energy. Inflation is expected to remain well above target in the coming quarters amid ongoing high commodity prices and supply constraints. FocusEconomics panelists see inflation averaging 7.1% in 2022, which is up 0.8 percentage points from last month. In 2023, our panel expects inflation to average 3.1%. 

At its 15–16 March meeting, the Fed raised the target range from 0.00%– 0.25% to 0.25%–0.50%, in a bid to tame price pressures. The move was in line with market expectations. Our panelists expect aggressive monetary tightening over the coming months, starting at the next meeting in early May, as the Fed tries to get a grip on inflation and inflation expectations. Our panelists project the federal funds rate to end 2022 at 2.27% and 2023 at 2.73%. • On 29 April, the dollar index traded at 98.8, up 2.3% month on month on a hawkish Fed and concerns over the global economic outlook as China’s economy entered a lockdown-induced downturn. Looking ahead, geopolitical tensions, the health of the global economy and the trajectory of U.S. rates will be key determinants of the dollar’s strength.  

Thank you Focus Economics

 

China’s Bid for World Domination: Belt and Road Initiative

by Chadwick Hagan

Published by The Epoch Times

The Belt and Road Initiative (BRI) is an internationally planned infrastructure development project for China and the emerging economies that trade with or border China. It is a move designed to recapture the ancient Silk Road and expand China’s influence. Critics say the BRI projects present dangers to participating countries, such as debt traps.

The original Silk Road lasted until the 15th century. It was a vast trade network that began in the Far East and ended in Europe, winding through the countries of modern-day Afghanistan, Kazakhstan, Korea, Kyrgyzstan, India, Mongolia, Pakistan, Tajikistan, Turkmenistan, and Uzbekistan. Today this area is ground zero for China’s BRI.

Originally called “One Belt, One Road,” China’s BRI combines the Silk Road Economic Belt, which has six development corridors: the New Eurasian Land Bridge Economic Corridor (NELBEC); the China–Mongolia–Russia Economic Corridor (CMREC); the China-Central Asia–West Asia Economic Corridor (CCWAEC); the China–Indochina Peninsula Economic Corridor (CICPEC); the Bangladesh–China–India–Myanmar Economic Corridor (BCIMEC); and the China–Pakistan Economic Corridor (CPEC). This is combined with the 21st century Maritime Silk Road, which begins in the South China Sea, flows through the Red Sea, and ends in the Mediterranean. Both roads end in Rotterdam.

The BRI is the most ambitious economic development and infrastructure project we have ever seen. Infinitely larger than the Suez Canal and the Panama Canal, the BRI aims to connect large swaths of land across China’s border and promote massive infrastructure developments.

Read more at The Epoch Times

“Sri Lanka warned of an unprecedented default and halted payments on foreign debt, an extraordinary step taken to preserve its dwindling dollar stockpile for essential food and fuel imports.”

-Asantha Sirimanne @ Bloomberg

It’s not everyday that you see a country default on debt payments. Sri Lankan officials have stated they are hoarding cash to buy food and essential supplies for the country.  

Here is a link to the official release from Sri Lanka’s Treasury. 

Outlook deteriorates

After GDP growth accelerated in Q4 due to stronger domestic demand, momentum has likely waned in Q1 as the latest Covid-19 wave and elevated price pressures drag on economic sentiment. Nevertheless, growth should have remained relatively healthy. The unemployment rate ticked up in January and consumer confidence continued to fall in February, which should be dragging on private consumption somewhat. Moreover, the manufacturing PMI averaged lower in January–February relative to Q4.

Meanwhile, the Chicago Fed National Activity Index—a leading indicator for GDP—eased in February, but continued to suggest a pick up in activity in sequential terms. On a brighter note, in February the labor market tightened and industrial production growth gained momentum. In other news, the U.S. continued to toughen sanctions on Russia in recent weeks, while also warning Beijing against providing military assistance to Russia.

GDP growth is projected to increase at a softer pace in 2022 due to a less favorable base effect. That said, activity should remain strong as upbeat private spending and investment support domestic demand conditions. Uncertainty over new Covid-19 variants, tighter monetary policy and ongoing tense relations with China pose downside risks. FocusEconomics panelists see GDP growing 3.4% in 2022, which is down 0.3 percentage points from the previous month’s forecast. In 2023, our panel sees the economy expanding 2.4%.

Inflation increased to 7.9% in February from 7.5% in January. Inflation is seen overshooting the Fed’s 2.0% target in 2022 due to a healthier domestic economy. Moreover, inflation is expected to accelerate from last year’s level as elevated commodity prices and some renewed supply chain disruptions stoke price pressures. FocusEconomics panelists see inflation averaging 6.3% in 2022, which is up 1.3 percentage points from last month. In 2023, our panel expects inflation to average 2.7%.

At its 15–16 March meeting, the Fed raised the target range from 0.00%– 0.25% to 0.25%–0.50%, in a bid to tame price pressures. The move was in line with market expectations. Moreover, the Fed said that its decision to reduce its QE purchases will be determined later this year. The majority of our panelists see several more rate hikes before the end of the year. Our panelists project the federal funds rate to end 2022 at 1.73% and 2023 at 2.39%.

The dollar index strengthened in recent weeks, likely due to a more hawkish Fed and market expectations for more rate hikes in 2022 than previously expected. On 25 March, the dollar index traded at 98.8, up 2.3% month-on-month. Looking ahead, the course of the pandemic, geopolitical tensions and the trajectory of the U.S. 10-year yield rate are factors to watch.

REAL SECTOR |

ISM manufacturing index increases in February The Institute for Supply Management (ISM) manufacturing index increased from 57.6 in January to 58.6 in February. Consequently, the index moved further above the 50-threshold signaling a slightly stronger improvement in manufacturing activity over the previous month. February’s stronger expansion was predominately driven by higher new orders and production growth relative to the previous month. That said, employment levels rose at a softer rate in February. Meanwhile, price pressures also increased at a slower pace in February. FocusEconomics Consensus Forecast panelists expect industrial production to increase 4.1% in 2022, which is down 0.1 percentage points from last month’s forecast. In 2023, panelists see industrial production rising 2.2%. FocusEconomics Consensus Forecast panelists expect GDP to grow 3.4% in 2022, which is down 0.3 percentage points from last month’s estimate. For 2023, the panel expects the economy to expand 2.4%.

Retail sales growth moderates notably in February Retail sales increased 0.3% in month-on-month seasonally-adjusted terms in February, which was softer than January’s 4.9% jump. February’s moderation was primarily due to a weaker rise in purchases of automobiles, while purchases of food and beverages declined relative to the previous month. On an annual basis, retail sales rose 17.6% in February, which was up from January’s 14.0% expansion. Meanwhile, annual average retail sales growth rose to 20.7% in February (January: +19.8%). Commenting on the latest print with regards to the monetary policy outlook, Katherine Judge, senior economist at CIBC World Markets, noted: “The January revisions show that the US economy was even more resilient during Omicron than thought, and add to the urgency for Fed rate hikes, as we expect the weak goods print for February to be offset by renewed demand for services as Omicron faded. The control group of sales is still 16% above where its pre-pandemic trend growth rate would have put it as of February, and we expect that degree of excess on the goods side of the economy to be pared back as services demand accelerates.” FocusEconomics Consensus Forecast panelists see private consumption growing 3.3% in 2022, which is down 0.3 percentage points from last month’s forecast. For 2023, the panel sees private consumption increasing 2.4%.

Labor market tightens further in February Total non-farm payrolls increased by 678,000 in February, following January’s 481,000 increase in payrolls. Employment gains occurred in professional and business services, and leisure and hospitality. The unemployment rate ticked down slightly from 4.0% in January to 3.8% in February, while the labor force participation rate increased to 62.3% in February—the highest level since March 2020—up from January’s 62.2%. Hourly earnings were flat month-on-month in February (January: +0.6% mom), while annual wage growth dipped to 5.1% from 5.5% in January.

After a soft Q4 outturn, most key indicators from the statistical office suggest a stronger start to 2022: January–February readings for industrial production, investment and retail sales were notably above market expectations. That said, the data is slightly difficult to reconcile with the ongoing steep property market downturn, and figures from other sources have been less rosy: The Caixin services PMI fell through February to a six-month low, while credit data slowed in February. Economic prospects darkened heading into March, as surging Covid-19 cases led to widening lockdowns across the country, affecting tens of millions of people. Plus, the Ukraine conflict has led to much higher global commodity prices, which could feed into domestic inflation. In politics, the government recently set a 5.5% GDP growth target for 2022, implying further stimulus measures ahead.

Growth is seen easing notably this year from last, amid a limp property sector and cooling export growth. That said, a ramping-up of stimulus measures should provide some support. Risks abound, chiefly the government’s tough stance regarding new Covid-19 cases, a deepening of the property crisis, and the Ukraine conflict—which could cause China-U.S. ties to fray further. FocusEconomics panelists expect GDP to expand 5.0% in 2022, which is down 0.1 percentage points from last month’s forecast. In 2023, the panel foresees GDP expanding 5.2%. 

Consumer inflation was unchanged at 0.9% in February, while producer inflation fell to 8.8% in February from January’s 9.1%. Consumer inflation is seen higher than its current level later this year on the recent surge in global commodity prices. However, stop-start Covid-19 restrictions are a downside risk. In contrast, producer inflation should ease on a base effect. Our panelists forecast that consumer inflation will average 2.2% in 2022, which is unchanged from last month’s estimate. In 2023, our panel sees inflation averaging 2.3%. 

The PBOC kept its key policy rate levers unchanged over the last month. That said, policy easing is highly likely ahead, in light of disappointing February credit data, the darkening economic panorama at home and abroad, and the slightly ambitious 5.5% growth target. Many panelists see cuts to the 7-Day Reverse Repo Rate and 1-Year Loan Prime Rate by year-end. Panelists project the 1-Year Deposit Rate to end 2022 at 1.49% and 2023 at 1.48%. • The PBOC allows the yuan (CNY) to trade within 2.0%, in either direction, of a daily reference rate. On 18 March, the yuan traded at CNY 6.36 per USD, down 0.6% month-on-month. The currency is seen weakening slightly by the end of this year, amid a projected cooling in external demand and as diverging monetary policy stances between China and the U.S. favor the USD. Our panelists see the yuan ending 2022 at CNY 6.46 per USD and 2023 at 6.43 per USD.

Report from Focus Economics April, 2022

Nickel prices averaged USD 24,016 per metric ton in February, which was 7.8% higher than January’s price of USD 22,285 per metric ton. February’s increase was largely attributed to lower stocks, amid heightened geopolitical tensions and demand for electric vehicles. The average price for nickel was up 29.2% from the same month last year. Moreover, on 28 February, nickel traded at USD 24,661 per metric ton, which was up 8.0% from the same day of the previous month.

Nickel prices surged in recent weeks, hitting another multi- year high at the end of February. As Russia, the third largest producer of the metal, invaded Ukraine, a backlash of sanctions and embargoes, such as Maersk’s refusal to ship to Russian ports and the UK’s decision to refuse Russian ships in its ports, likely fueled fears of disruptions to deliveries of the metal ahead. On the demand side, EV car sales remained healthy in recent weeks while stocks in the London Metal Exchange warehouses are reportedly down to nearly one- third of April 2021’s levels last year, seemingly adding further upside pressures to nickel price rally.

Nearly half of our panelists revised their forecasts upwards this month, while others took a wait-and-see approach amid fast-changing military conflict in Ukraine. Overall, prices are expected to cool from their current levels ahead, albeit remaining elevated nonetheless. Rising output for both nickel pig iron and battery-grade nickel will exert downward pressure on prices. That said, strong demand from the stainless steel industry—expected to be the main driver of nickel use in the near term—and rising appetite for EV batteries will sustain prices. Uncertainty stemming from the war in Ukraine is a key outlook risk. FocusEconomics panelists see nickel prices averaging USD 20,513 per metric ton in Q4 2022 and USD 19,014 per metric ton in Q4 2023.

This month, 7 panelists on our Consensus Forecast panel raised their Q4 2022 projections. Meanwhile, no panelists cut their forecasts and 8 left their forecasts unchanged from the previous month.

Focus Economics

Since the late 2010s there has been re- newed debate about the merits and demerits of progressive wealth taxation. This debate has largely been motivated by the increase in wealth concentration in recent decades. In the United States, the share of total household wealth owned by the 0.0001% wealthiest Americans—a group that includes 18 individuals with more than $50 billion in wealth in 2021—has been mul- tiplied tenfold since Forbes started publish- ing data on the richest Americans in 1982. Wealth concentration has increased partic- ularly fast during the Covid-19 pandemic (see Figure 1). All estimates show a dra- matic increase in wealth concentration since the late 1970s (see Saez and Zucman, 2020 for a discussion of the data and reconcili- ation of the various estimates). Moreover, as wealth concentrated, the ratio of wealth to national income doubled from less than 3 in the late 1970s to over 6 in 2021. Top- end wealth is large relative to the economy, and therefore a sizable potential tax rev- enue source (Saez and Zucman, 2019).

To shed light on the practicality and de- sirability of taxing wealth, this paper stud- ies the historical experience with wealth taxation in Europe. Using new research on the distribution of wealth over time in Eu- rope, we show that the European wealth taxes had a narrow base, due to large exemptions, tax avoidance, and tax eva- sion. We explain why such exemptions were granted and how they undermined Euro- pean wealth taxes, leading in many cases to their repeal.

Wealth Taxation: Lessons from History and Recent Developments (Emmanuel Saez / Gabriel Zucman)

1. Politics
Jair Bolsonaro will be defeated in Brazil's 2022 presidential election.

The US GOP will still suffer identity and leadership issues, despite a surge in conservative popularity.

Roe v Wade will suffer a defeat, adding to the GOPs identify issues going further.

The border will remain a political issue and will likely not improve during 2022.

American hegemony will take further hits, as battles with Russia and China continue on.

Boris will remain in power.

The UK monarchy will not fail.

2. Economics
American society will not become more equitable.

American jobs will continue to unbundle from the previous era's form of employment. More for less. 

In America, Cities will continue to step up to fill the void left from the lack of proper governance from states and the federal government. 

Influencers, a new phenomenon, will be replaced by virtual influencers. 

Work from home (WFH) will continue on, presenting new problems and new joys for the workforce, landlords and employers. 

Antitrust will prevail in the battle between politics and technology companies.

ETH will overtake BTC in usability, utility and eventually price per unit. 

NFTs are here to stay. 

Inflation will pass. 

3. Environment
Plastic will continue to come under fire and suffer bans en masse, but plastic companies will not stop making plastic (at least this year).

Ecocide will official become law in some nations.  

Animals rights will increase in the rich world and in developing nations dependent on tourism. 

 

 

A Legal Framework for Decentralized Autonomous Organizations

This analysis was written by David Kerr (Principal, Cowrie LLC) and Miles Jennings (General Counsel, Crypto, Andreessen Horowitz). Special thanks to Marc Boiron, Aaron Wright, Molly McQueen and Connor Spelliscy for their contributions and insights. David Kerr is a recipient of a research grant from the DAO Research Collective.

Introduction The United States regulatory environment surrounding digital assets presents an extraordinary challenge for blockchain and smart contract-based protocols. In the absence of comprehensive legislation addressing the complexities of this developing technology, individual regulatory agencies have been forced to provide their interpretations of how regulations should be applied to situations and technologies, well beyond what was considered when the current laws and regulations were enacted. Although it is universally agreed that comprehensive reform and new legislation is a necessity, the reality exists that the developers and users of blockchain technology have been left to navigate a patchwork regulatory environment insufficient to address relatively simple issues related to digital assets, let alone the additional complexity accompanying the decentralized alternatives to traditional financial service offerings available through smart contract-based protocols. The vast majority of blockchain networks and smart contract-based protocols are organized as, or intend to implement, DAOs, which are member controlled organizational structures that operate absent a centralized authority. 3 While blockchain networks utilize a number of different consensus mechanisms, DAOs of smart contract-based protocols are typically facilitated by a set of governance-related smart contracts that have specified control rights with respect to the smart contracts making up the underlying protocol, all of which are built on distributed ledger technology, most commonly the Ethereum blockchain. These governance smart contracts disintermediate transactions between counterparties by automating the decision-making and administrative processes typically performed by traditional management structures. Decentralization of a given protocol occurs when control (e.g., governance) of the non-immutable aspects of a protocol’s smart contracts is passed from the developers to the members of a DAO via the activation of governance smart contracts. Decentralized Finance (“DeFi”) protocols are one example of smart contract-based protocols. DeFi protocols provide alternative mechanisms to perform many traditional financial services that are, often times, highly regulated themselves (i.e., payments, swaps and derivative transactions, insurance, asset trading, lending and investing). As the functionality of many DeFi protocols deviates significantly from traditional financial services, significant interpretive obstacles exist in determining the manner and extent that existing statutory authority is applicable. Although the SEC, CFTC, FinCEN, OFAC, IRS, Department of Treasury and state regulators have issued guidance and interpretations concerning digital assets, the issues highlighted in that guidance and the concentration of accompanying enforcement actions has resulted in a prioritization of the following: (i) identifying the applicability of SEC and CFTC registration requirements, (ii) taxation of virtual currency as property and the need for taxpayers to include virtual currency activities on their tax returns and (iii) the implementation of BSA compliant Anti-Money Laundering (“AML”) and Know Your Customer (“KYC”) programs.

Read more at a16z

It turns out Amazon collects a striking amount of information from customers. Perhaps more than we expected. U.S. Amazon customers can obtain their data by filling out a form on Amazon.com, here is the link. - Editors

"A look at the intimate details Amazon knows about us"

Friday, 19 November 2021 11:27 GMT

By Chris Kirkham and Jeffrey Dastin

Nov 19 (Reuters) - As a Virginia lawmaker, Ibraheem Samirah has studied internet privacy issues and debated how to regulate tech firms' collection of personal data. Still, he was stunned to learn the full details of the information Amazon.com Inc has collected on him.

The e-commerce giant had more than 1,000 contacts from his phone. It had records of exactly which part of the Quran that Samirah, who was raised as a Muslim, had listened to on Dec. 17 of last year. The company knew every search he had made on its platform, including one for books on "progressive community organizing" and other sensitive health-related inquiries he thought were private.

"Are they selling products, or are they spying on everyday people?" asked Samirah, a Democratic member of the Virginia House of Delegates.

Samirah was among the few Virginia legislators who opposed an industry-friendly, Amazon-drafted state privacy bill that passed earlier this year. At Reuters' request, Samirah asked Amazon to disclose the data it collected on him as a consumer.

The company gathers a vast array of information on its U.S. customers, and it started making that data available to all upon request early last year, after trying and failing to defeat a 2018 California measure requiring such disclosures.

Seven Reuters reporters also obtained their Amazon files. The data reveals the company's ability to amass strikingly intimate portraits of individual consumers.

Amazon collects data on consumers through its Alexa voice assistant, its e-commerce marketplace, Kindle e-readers, Audible audiobooks, its video and music platforms, home-security cameras and fitness trackers. Alexa-enabled devices make recordings inside people's homes, and Ring security cameras capture every visitor.

Such information can reveal a person's height, weight and health; their ethnicity (via clues contained in voice data) and political leanings; their reading and buying habits; their whereabouts on any given day, and sometimes whom they have met.

One reporter's dossier revealed that Amazon had collected more than 90,000 Alexa recordings of family members between December 2017 and June 2021 – averaging about 70 daily. The recordings included details such as the names of the reporter's young children and their favorite songs.

Read the rest at Thompson Reuters Foundation.

 

OVERVIEW: OUTLOOK REMAINS STABLE
GDP growth has likely lost some momentum in the third quarter, after accelerating slightly in Q2 on the back of stronger private consumption and rebounding exports. In August, the Chicago Fed National Activity Index—a leading indicator for GDP—moderated notably from July due to weaker industrial output and private consumption activity. Moreover, consumer confidence dropped to its lowest level since February in August, while the increase in nonfarm payrolls eased notably in the same month and average retail sales declined in July–August—all further pointing to a slowdown in private consumption in the quarter. Furthermore, despite remaining upbeat in July–August, the ISM manufacturing PMI was below Q2’s average. On the Covid-19 front, daily new cases of the virus have remained elevated in recent weeks, despite solid vaccination progress, which is likely dampening GDP prospects for Q4.

GDP will expand rapidly this year as the impact of the pandemic fades and the labor market recovers. In 2022, growth should moderate on a less favorable base effect, but recovering household consumption and pentup demand will likely keep momentum upbeat nonetheless. Uncertainty over new Covid-19 variants and ongoing tense relations with China pose downside risks. FocusEconomics panelists see GDP growing 6.1% in 2021. In 2022, our panel sees the economy expanding 4.1%, which is unchanged from the previous month’s forecast. • Inflation ticked down to 5.3% in August from 5.4% in July. This year, inflation is seen overshooting the Fed’s 2.0% target due to ultra-low interest rates and rebounding economic activity. In 2022, price pressures are seen moderating as some supply chain disruptions ease and output normalizes. FocusEconomics panelists see inflation averaging 4.2% in 2021. In 2022, our panel expects inflation to average 2.9%, which is up 0.2 percentage points from the previous month.

At its 21–22 September meeting, the Fed kept the target range at 0.00%– 0.25% in order to spur the economy, but hinted at some tightening in the form of tapering its QE purchases due to healthier economic indicators and stronger price pressures in recent months. Most panelists see the first rate hike in 2023, although a minority expect some tightening in 2022. Our panelists project the federal funds rate to end 2021 at 0.25% and 2022 at 0.33%.

The dollar index appreciated slightly in recent weeks, likely due to a more hawkish tone from the Fed. On 24 September, the dollar index traded at 93.3, strengthening 0.4% month-on-month. Looking ahead, the course of the pandemic, the trajectory of the U.S. 10-year yield rate and geopolitical tensions will have a key bearing on the direction of the USD.

REAL SECTOR
ISM manufacturing index rises slightly in August The Institute for Supply Management (ISM) manufacturing index ticked up to 59.9 in August from 59.5 in July, consequently the index remained wellabove the 50-threshold that separates expansion from contraction in the manufacturing sector. August’s slightly stronger expansion was the result of faster growth in new orders and production. That said, employment levels decreased notably relative to the previous month. On the price front, input prices continued to rise on the back of higher raw material prices but at a slower rate compared to the month prior.

FocusEconomics Consensus Forecast panelists expect industrial production to increase 6.0% in 2021, which is unchanged from last month’s forecast. In 2022, panelists see industrial production rising 4.0%, which is down 0.1 percentage points from the previous month. FocusEconomics Consensus Forecast panelists expect GDP to grow 6.1% in 2021, which is down 0.3 percentage points from last month’s estimate. For 2022, the panel expects the economy to expand 4.1%, which is unchanged from last month.

Retail sales rebound in August Retail sales grew 0.7% in month-on-month seasonally-adjusted terms in August, which contrasted July’s 1.8% decrease. Looking at the details of the release, August’s pick up was broad-based. Food and beverages and general merchandise stores output gained steam, while motor vehicle and parts dealers production contracted at a softer rate. Lastly, non-store retailer sales rose at a stronger rate, while gasoline stations sales moderated. On an annual basis, retail sales rose 15.1% in August, which matched July’s expansion. Meanwhile, the trend improved significantly, with the annual average growth of retail sales coming in at 15.3% in August, up from July’s 14.3% reading. Commenting on August’s print, Francis Généreux, a senior economist at Desjardins, stated: “The growth in retail sales in August, particularly if we exclude motor vehicles, is encouraging and suggests the new wave of the pandemic is not having a major impact on the economy. This could further reassure Federal Reserve officials.” FocusEconomics Consensus Forecast panelists see private consumption growing 7.9% in 2021, which is down 0.1 percentage points from last month’s forecast. For 2022, the panel sees private consumption increasing 3.8%, which is down 0.3 percentage points from the previous month.

GDP Growth

GDP growth lost some momentum in Q2, after hitting an over 10-year high in Q1. The slowdown was predominately driven by a weaker external sector as export growth tapered and import growth strengthened. However, domestic demand rebounded notably in the quarter—hitting an over 11- year high—as both private consumption and fixed investment surged. Turning to Q3, year-on-year growth is likely losing further momentum due to a slightly less favorable base effect, but the economy should be strengthening on a sequential basis. In August, the government began disbursing electronic vouchers of HKD 5000 to permanent residents, which should be stoking private spending. Moreover, the private sector PMI continued to point to an expansion in activity for July, boding well for GDP. Nevertheless, the government’s “zero Covid-19” strategy continues to hamper the tourism sector amid prolonged travel restrictions. GDP should expand robustly this year, after a two-year-long recession exacerbated by political unrest and Covid-19. A recovering global economy should power external demand, while domestic activity should gradually strengthen, supported by government stimulus. That said, uncertainty over the spread of the Delta variant poses a downside risk to the outlook. 

Real Sector

The IHS Markit Purchasing Managers’ Index (PMI) fell to 51.3 in July from June’s 51.4. As a result, the index remained above the 50-threshold, but pointed to a moderating improvement in the private sector from the previous month. The slight moderation was predominately due to falling employment levels due to rising wage costs. Nevertheless, output and new orders were relatively unchanged accelerating slightly over the previous month. Commenting on the latest reading, Jingyi Pan, economics associate director at IHS Markit, noted: “Demand and output growth accelerated, which had been positive signs, although foreign demand appeared to have softened once again as Covid-19 disruptions remained a prevalent issue abroad. Price pressures also persisted for Hong Kong SAR private sector firms.”

Retail sales grew 2.8% year-on-year in June (May: +7.8% yoy). The outturn marked the worst reading since January. The reading reflected a broad- based downturn across the major sectors, with fuel, supermarkets and food and alcoholic beverages all contracting in June. Lastly, jewelry, watches and valuables sales moderated, while clothing and footwear sales increased. Meanwhile, the trend improved notably, with the annual average variation of retail sales coming in at minus 1.7% in June, up from May’s minus 4.0%.