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US Economy Contracts
US Q1 GDP Figures released yesterday indicated that output fell 1.4% on an annualised basis – the first contraction in growth since mid-2020, when Covid lockdowns hammered output. Yesterday’s print was a considerable change from the record level of growth that the US saw during Q4 2021 where the economy grew 6.9% and the news feeds into the concerns over the health of the US economy moving forward.The poor performance in US output was impacted by the US trade deficit hitting record highs of $125bn over March representing a 17.8% rise. Much of the increase in imports is thought to have come from business rebuilding their inventories and preparing for further supply disruptions in addition to hedging against rising inflation. Nevertheless, while growth was poor, business investment rose 9.2% over the quarter – a considerable increase from the Q4 2021 print of 2.9%. Personal consumption also rose 2.7% over Q1 – which represented a slight rise from the previous quarter’s 2.5%. Given yesterday’s print, a further contraction of growth this quarter would see the US enter a technical recession. Indeed, last month, the US yield curve briefly inverted, meaning that for the first time since 2019, two-year treasury yields (which rose as high as 2.45%) were above that of the ten-year yields (which fell to 2.38%). Given that this signal has been a prelude to every recession in the US since 1950 (within the space of two years), many investors are considering it as a red flag moving forward, especially given that inflation reaching levels not seen for four decades is forcing the Fed to raise rates quicker and for longer than previously anticipated. Given persisting inflation, supply chain issues and the prevailing risk-off sentiment all major growth forecasts for the world’s largest economy have been revised down and yesterday’s print is indicative of these concerns. For example, Goldman Sachs forecasted 1.75% growth in 2022 – down from their previous predictions of 2% while the IMF are predicting 3.6% growth over 2022, after a similar downward revision. Hence, today all eyes will be focused on US earnings and consumer sentiment data which is released later today to provide further insight on the health of the US economy The Economist has more:
Ukraine The UK is making strong signals of its own, with a deployment of 8,000 troops to Eastern Europe to take part in military drills. As well as troops, tanks and armoured vehicles will also be sent, and UK forces will be joined by NATO allies and other Expeditionary Force allies from Denmark, Iceland and Norway. This comes in spite of warnings from Putin that Russia will take ‘lightning fast’ action against foreign interference in Ukraine. Channel 4 News had former Finnish PM Alexander Stubb on the show last night and was questioned on the risks of escalation of the conflict due to the increasing rhetoric. His response was brilliant and basically said that the media is probably hyping this up a bit because of ‘war fatigue’ and that instead of escalation the reality is that Putin is doing really badly in Ukraine and that both politically and militarily he’s got his hands full and therefore hasn’t got very much room for manoeuvre. He also said that the Finnish application to join Nato will be filed around the 15th May, together with Sweden, then at the Nato summit at the end of June will approve it, with ratification and membership complete by the end of the year – which is something that Putin’s war in Ukraine has achieved. The clip is here and starts at 12m 20s:
BVI Leader Detained in Drug’s Smuggling Investigation Following the arrest, Liz Truss will now hold an emergency meeting with the Governor of the BVI John Rankin who acts as the de facto head of state and appoints the head of the government. This is, however, not the first time that Fahie has been in hot water as in 2021 was subject to a public enquiry into corruption. This involved an investigation into an allegation that the government spent some £5m of public funds on a non-existent airline, a £700,000 school fence. A policeman was also said to have been found with £200m of cocaine. More generally, in 2016, the Panama Papers – which involved a leak of 11.5 million financial and legal records – indicated that the BVI was also a prominent tax haven. In fact, in 2018 a BBC investigation found that of all overseas firms holding property in England and Wales, a quarter of these companies was held in the BVI.
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