Multi-Asset

Weekly review: Consumer boom imminent in the US and UK

Macro Update 29 March 2021
March 2021

Steven Bell

Managing Director, Portfolio Manager & Chief Economist, Multi Asset Solutions

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Risk Disclaimer 

Past performance is not a guide to future performance. The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

Consumer boom imminent in the US and UK

Another week of drama for financial markets. With a colossal ship blocking the Suez Canal, reports of huge forced liquidations of equities by a hedge fund in trouble, not to mention fears of vaccine trade wars, a quarter-end approaching with massive rebalancing flows and more detail on Biden’s infrastructure programme of $3 trillion spending financed in part by higher corporate taxes. We take a look at all this and highlight once again the contrast between the strong economic prospects in the UK and US and the more dismal situation in Europe.

 

Let’s begin with the virus, vaccines and lockdowns.

The US has been easing lockdowns for a while – remember that this is mostly up to individual states. Following this and Spring Break, new cases of the virus are beginning to edge higher. But because many of the more vulnerable people have been vaccinated and it’s the young who are heading for bars and restaurants, hospitalisations are still falling. The pace of decline has slowed and it’s a race between vaccination and greater social interaction. We reckon the nation as a whole will win that race. Note that Biden has raised the vaccination targets and expects every adult will have been offered a jab by early May. A fantastic achievement. With massive fiscal stimulus payments hitting consumers bank accounts this month, the stage is set for a boom in Q2 and Q3. Indeed, US consumers have still got much of the stimulus payments from last year – a sort of Covid ‘piggy bank’ – which amounts to around a year of extra income.

 

Chart - US - Savings as percentage of disposable income

Source: BMO Global Asset Management and Bloomberg as at 19 March 2021

 

There’s even a nickname for it all – “stimmies”, short for stimulus money. Some has gone to pay down debt, some has gone into the stock market, but most is available to spend. We’ll get an idea of how this translates into jobs with the March non-farm payroll numbers on Friday.

 

Chart - UK - Savings as percentage of disposable income

Source: BMO Global Asset Management and Bloomberg as at 19 March 2021

 

The UK is also benefiting from a strong vaccine roll-out and has its own Covid piggy bank. Not as big as the US but still huge. And our lockdown has been much more strict. Easing began very cautiously at the beginning of this month and the plan for England sees almost all restrictions going by 21 June. I expect a huge boom in the UK too. We are ahead of the US on the vaccine roll-out and have maintained a tighter lockdown for longer.

 

What could go wrong?

In the UK, we need the EU to resist a vaccine blockade. And it’s not just a case of the AstraZeneca vaccine, which has attracted the most vehement criticism. The Pfizer vaccine is made in Belgium and the supply chain for the Moderna and Novavax vaccines involve Europe too. Last week’s European Council meeting ended in disunity, with several countries resisting the protectionist stance taken by the European Commission, which is attempting to deflect the blame for a fumbled vaccine roll-out. We remain optimistic that disruption to supply chains will be limited, that the UK will offer to divert only modest amounts of supplies to Europe, but we’ll have to see. The US isn’t helping in this regard either; the Biden administration maintains that there is no export ban, but they have taken emergency powers to restrict exports. The EU hoped for 10 million doses of the AstraZeneca vaccine, which has yet to be approved for use in the US, but they haven’t arrived.

 

Vaccine roll-out slowing in the UK, but not stalling

The UK government expects the pace of vaccination to slow in April. But it’s currently running at 6% of the population a week, ahead of the US for now and more than double the best in Europe. So, there is room for a significant slowdown while still meeting the target of offering every adult a jab by the end of July.

The contrast with Europe is stark. New cases are on the rise and with little more than 10% of of the population having received a jab, this is feeding through into increased hospitalisations and fatalities. This result is forcing governments to tighten lockdowns. Ordinary people are fed up and political tensions are on the rise. Although there was some good news in the PMIs last week, they related to the period before restrictions were tightened notably in Germany. Recession remains in the eurozone. There should be a surge in vaccine supply in Q2 – and that will help to defuse tensions with the UK – but I reckon that Europe is at least 3 months behind us and national governments have managed to fan the flames of vaccine sceptics, so there is a real risk that a significant unvaccinated group will allow the virus to continue to circulate and mutate.

This is very bad news for Europe and it means that travel restrictions with the UK and elsewhere will remain. The UK has plans for lorry drivers from the continent to be tested when they arrive in the UK. This measure is too weak, but the problem is that we cannot allow trade to suffer. But as the year progresses, huge quantities of vaccines will help to contain the virus. We’ll have booster jabs this autumn designed to beat multiple variants.

 

Beer, bricks and banks

All this suggests that the global economy will continue to recover. With bottle necks spreading from manufacturing to services, I expect inflation to pick up. Rebalancing flows have supported bond yields in the last week or two. That support largely ends this week and I expect bond yields to rise in the UK and US in April. A headwind for risk assets but I do expect them to outperform.

The UK equity market is still heavily under-owned by international investors and we should see foreign buying as the economy recovers. It’s domestic plays that should benefit most. Talking to my colleagues here at BMO Global Asset Management about the themes in our UK equity portfolios, they favour beer, bricks and banks. Sounds like a good strategy to me.

Risk Disclaimer

Past performance is not a guide to future performance. The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

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