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Next week's economics: 6-10 July

Next week should bring evidence of a recovery, but also doubts about its strength and sustainability
July 2, 2020

Next week should bring evidence of an economic recovery in the eurozone as lockdowns are eased.

Monday’s figures should show that retail sales in the region rose a little in May, after falling by 11.7 per cent in April – a drop that took the volume of sales back to 1997 levels.

We should also see bouncebacks in industrial production in May in Germany, France and Italy, where the lockdowns had cut output by over one-third. Production will, however, still be far below its pre-pandemic peak – reached as long ago as November 2017 in Germany’s case.

Worse still, it’s unclear how quickly activity will return to those peaks. The problem here is not only that customers might be frightened of a second wave of coronavirus into staying at home more. It’s that spare capacity and a scarring effect on risk attitudes might retard capital spending, while fiscal policy might continue to be insufficiently supportive of demand.

Such pressures mean the European Central Bank is likely to continue its quantitative easing programme for many months, and to keep interest rates below zero for even longer. The question for equity investors is whether uncertainty about economic activity will be more than offset by the supportive effect of cheap money and a 'reach for yield'.

In China, we could also see a sign of economic recovery. The People's Bank of China could report that growth in the narrow money stock has accelerated to over 7 per cent, its fastest rate since early 2018. This is good news because in the past such accelerations have been lead indicators (with a lag of a few months) of pick-ups in industrial production. This should be especially good news for holders of oil and mining stocks, as this is usually accompanied by rising commodity prices. Sadly, however, growth is still so low as to point to only a weak upturn, and of course there are questions about whether pre-pandemic statistical relationships will continue to hold.

In the UK, the Halifax is likely to report a fourth successive monthly drop in house prices. In a sense, this is artificial as few properties are changing hands at any price. But it poses a question: will this pandemic have a lasting adverse impact upon prices? Insofar as it is raising unemployment and increasing uncertainty, I suspect it will.