The last couple of weeks have seen the release of two items of economic data which are of interest. First, recent figures indicate that retail sales are now above their pre-pandemic level which is a very encouraging sign that the recovery is beginning to take hold. Nonetheless, this should not be too surprising. There was significant pent-up demand during the two or three month period when the economy was locked down and consumers are now once again able to spend money. At the same time, the government has been active in providing finance to people through its furlough schemes to ensure they continue to have disposable income. Moreover, the threat of travel disruption has meant that many have chosen to remain in UK for their summer holidays which is helping to support the tourist industry, bars and restaurants. While these are positive indicators for the UK economy this increase in sales is to be expected. However, as we move into the autumn, our suspicion is that demand will begin to falter somewhat. Those that have not already lost their jobs may have concerns that they are at threat as the government’s furlough scheme begins to unwind. Similarly, businesses are also likely to be reluctant to commit to major investment plans given the ongoing uncertainties in the economy. We should not, therefore, expect this rebound in the economy to be sustained over the coming months and these concerns are some of the reasons why we remain cautious in our UK positioning.
A slight pick-up in inflation rates has also been in the news over recent weeks. Again, this should come as no great surprise. The pandemic has brought additional costs to many businesses which have been obliged to implement social distancing measures while venues such as restaurants can no longer operate at full capacity. It might be expected that some of these expenses are passed on to consumers. We do not believe this will be sustained: the higher inflation rate simply reflects some one-off price increases. If we are correct and demand softens over the coming months pricing pressures are going to remain very acute and businesses will struggle to push through sustained price increases. This increase in inflation is not therefore a long-term threat, in our view.