After three straight sessions of a weakening FTSE 100 index, I was heartened seeing its recovery in early trading on Friday. But it has weakened once again as I write on Friday afternoon. With no big results or other company news visible to me, it is possible that the latest data on the economy has disappointed investors.
UK economy slows down, US producer prices rise
In July, growth slowed down to a virtually non-existent 0.1% from June. By comparison, in June it had reported a much higher 1% growth. The UK economy is still 2.1% smaller than its pre-coronavirus level in February 2020. I do think this is a downer, considering that the UK’s ‘freedom day’ actually happened during the month. With a complete easing in lockdown, growth should ideally have been higher.
Further, news from the other side of the pond may be a cause of concern too. The US reported an annual increase of 8.3% in producer prices in August. This is the biggest rise in over a decade, and can feed further into fears of rising inflation, since rising costs for producers may be passed on to consumers.
It is not as bad as it looks
I do think, however, that the situation is not as bad as it appears from these reports. In fact, I do not think it is bad at all. Let me talk about the UK numbers first. These are for a single month. In its press release, the Office of National Statistics (ONS), as has recently been the norm, alerts us to the fact that the latest numbers are subject to more uncertainty than usual, because of the present challenging environment. For that reason alone, I would not make too much of the latest numbers. At the very least, I would look at a quarter’s numbers to get a sense of where the economy is headed. And last quarter’s numbers were strong.
That brings me to inflation. While it is true that the annual increase for producer prices looks alarming, on a monthly basis it has actually come off. So I would take the number with a pinch of salt. Also, economists commenting on it believe that it is a transitory phase. When the demand-supply imbalance wears off, prices will cool down. This imbalance is because consumers have been focused on buying goods as services like travel and entertainment were restricted so far.
What I’d do now
In the meantime, I am focusing on the positive aspects of the economic report for the UK. As per the ONS, “Arts, entertainment and recreation activities grew by 9.0%, boosted by sports clubs, amusement parks and festivals, and reflecting the easing of restrictions on social distancing from 19 July 2021.” Based on this, I am now interested in further developments in stocks related to entertainment like cinemas and recreation like pubs.
Of course, coronavirus trends are playing spoilsport for now. This means that these stocks may not take off quite as hoped in the short term. They are still on my radar, however.