The Eurozone and the UK are starting to boom as their economies reopen.
First, the pandemic is flattening across Europe. Hospitalizations and virus-related fatalities are falling in the Eurozone. By July, the European Union is likely to have vaccinated 70% of its population while the UK has already administered at least one vaccine dose to over 70% of its residents.
Second, the Eurozone and the UK are reopening rapidly, causing confidence to surge. On Friday, May’s purchasing manager indices (PMI) were much stronger than expected.
The chart shows the Eurozone’s composite PMI data increased from 53.8 to 56.9 (a reading above 50.0 indicates activity is expanding and below 50.0 contracting). Manufacturing PMI remained near record levels at 62.8 while services PMI improved sharply to 55.1 as reopening led to increased demand. Similarly, the UK’s composite PMI hit an all-time high of 62.0 this month with manufacturing PMI increasing to 66.1 and services PMI rising to 61.8. Thus, GDP growth is likely to rebound strongly in both the Eurozone and the UK over Q2’21.
Third, last week’s data releases showed the UK’s major economic indicators are all rebounding. For example, March’s employment data was better than expected with the UK jobless rate dipping from 4.9% to 4.8%.
Source: Bank of Singapore, Bloomberg
Though 8% of the UK workforce remains subsided by the government’s Jobs Retention Scheme (JRS), the unemployment rate looks set to peak around 6% when the JRS ends in September, well below its 8% level after the 2008 financial crisis.
April’s CPI inflation also increased from 0.7%YoY to 1.5%YoY with consumer prices rising 0.6% last month. The headline rate was flattered by base effects as energy prices have recovered sharply over the last 12 months. But inflation is set to exceed the Bank of England’s 2% target in H2’21, peaking near 2.5%YoY, as the UK economy fully reopens. Similarly, on Friday, April’s retail sales surged by 9.2%MoM putting UK GDP on course to bounce by over 4%QoQ in Q2’21 alone.
The European Central Bank and Bank of England hold their next monetary policy meetings on June 10 and June 24 respectively. The ECB is likely to modestly slow its pace of quantitative easing as the Eurozone rebounds while the BoE has already begun tapering its bond buying. With UK GDP set to expand by a rapid 6.0% this year, we expect the BoE will be the first major central bank to raise interest rates as soon as the middle of 2022. We also see the ECB ending its quantitative easing early next year as Eurozone GDP is likely to rebound by a firm 4.5% in 2021.
In short, faster economic growth, rebounding sentiment and monetary tightening are likely to push the EUR and GBP higher towards our long-term targets of 1.25 and 1.44 against the USD.
