Economic growth fears

The welcome return to economic growth continues to be tempered by fears of rising prices, as elements of supply and demand remain out of kilter.

Article updated: 4 June 2021 8:00am Author: Richard Hunter

Such inflationary concerns will be revisited after the release of the non-farm payrolls release later today. There is a clear consensus that the reading will be significantly higher than last month’s unexpectedly low number of 266000, but there is also a particularly wide spread on what the figure might be, ranging from 650000 to 750000.

A particularly strong reading would reignite the debate on monetary policy. While the Federal Reserve continues to maintain its view of inflation as a passing phase, there are nonetheless suspicions that the voices for the tapering of Quantitative Easing – if not interest rates – are becoming louder.

As such, growth stocks have again found themselves in the eye of the storm, especially big technology firms where the tech-focused Nasdaq index has been under renewed pressure. The index still remains ahead by 5.6% in the year to date, although some way off the 14000 level breached earlier in the year.

Even so, the cautious optimism of what is undoubtedly an improving economic situation has enabled the other major indices to maintain progress over the last week, with the Dow Jones ahead by 13% and the S&P500 by 11.6% so far this year.

The UK is also at something of an inflection point.

On the one hand, recent economic data is pointing to a burgeoning recovery, as evidenced by strong manufacturing and services sectors readings, with the UK’s leading position in its vaccination rollout enabling the release of some pent-up demand.

At the same time, however, this very growth is also putting pressure on supply, where imbalances are beginning to emerge in the face of labour and raw material shortages. In addition, the government’s additions to the amber and red travel lists has dealt another blow to the beleaguered airline and tourism sectors, while doubts over the 21 June release date is another potential headwind.

Even so, the UK is well placed in the face of a return to cyclical growth and on valuation grounds is still largely being regarded as a favoured destination for investors. The FTSE100 remains ahead by 9.3% in the year to date and the more domestically focused FTSE250 by 11.2%, with the prospect of further gains for both as the inflationary picture becomes clearer.

More from Richard Hunter: read more articles directly on the interactive investor website.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

Richard Hunter

Head of Markets, interactive investor

Richard has over 30 years of stockmarket experience and is one of the UK’s foremost commentators on market matters and a regular contributor for the BBC (BBC News Channel, Wake Up to Money and the Today Programme), CNBC and Bloomberg. Richard’s expert commentary also appears across the national and specialist press. He previously held senior positions at Hargreaves Lansdown and NatWest Stockbrokers.

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