As COP26 summit gets underway UN warns world is on target for 2.7 degrees of global warming by the end of the century, bond yields get spooked by another fresh high for Euro zone inflation and foresters mobilise to defend their rights to carbon sequestered on private lands. All these stories and more are covered in this week’s insights update from BlackBee.
We saw more evidence of the mixed recent performance of the global economy last week as Q3 GDP reports began to come in. The US economy struggled to match its strong recent run, growing by only 2% in the third quarter. The much weaker performance in Q3 was down squarely to softer consumer spending as COVID infections rose again and supply chain problems hit spending on goods hard during the period.
In the Euro area GDP growth for Q3 came in a little stronger than expected at 2.2%. Much of the outperformance was driven by the performance of the French and Italian economies which have been playing catch up as their economies have reopened. However the powerhouse of the region, Germany, lagged growing by only 1.8% which cast a shadow over the overall Euro area result.
Our take on global macro data at present is that COVID and supply chain bottlenecks in particular are robbing the global economy of some momentum right now. Our chart of the week this week looks at the evolution of global GDP growth forecasts over the past few months. As we can see there are some signs of growth forecasts being chipped away at in recent times, something we put down to supply chain issues in particular. However on the whole the growth outlook into 2022 still looks constructive as economies recover further from the pandemic.
From a longer term economic perspective, this week is a crucial one as the COP26 summit gets underway in Glasgow. As if the climate challenge wasn’t stern enough, the scale of it was heightened by last week’s report from the UN which showed that based on countries’ existing commitments the world is on track for 2.7 degrees Celsius of global warming by the end of the century. The report also noted that in order to meet the existing Paris climate targets, global emissions need to halve by the end of the decade. The time for action is now!
Equities managed to make further progress last week with positive Q3 earnings reports again providing the main firepower to drive indices higher. The positive results season has meant that Q3 2021 earnings in the US are now tracking nearly 33% higher than the same quarter in 2020, a stronger growth rate than had been expected at the beginning of the results season. However it wasn’t all good news – both Apple’s and Amazon’s results were weaker than expected as supply chain and wage costs hit home in a sign that broader macro issues are now having more of a micro impact on companies. In Amazon’s case operating costs rose by $2 Billion in Q3, much of this down to higher labour costs which are set to become even more pressing as the Christmas shopping season approaches. This sting from supply chain and wage issues hurt technology heavy indices late in the week.
On the whole government bonds enjoyed a positive week last week as the theme of a slowing economy helped push yields lower and prices higher. However, it wasn’t plain sailing as the latest inflation data in the Euro zone again caused some nervousness. Although ECB President Christine Lagarde stressed that inflation would fade next year and rate hikes weren’t required, a fresh high for inflation at 4.1% in October pushed yields higher later in the week as investors were spooked by the notion that rate hikes would have to come sooner rather than later with inflation at these levels. Our view is that even in spite of high rates of inflation, the ECB is unlikely to hike rates in 2022 given the grave risks this would pose to the recovery in the Euro zone which is already unbalanced as things stand.
Price action in the commodity space was more muted last week with the overall sector largely unchanged. Oil prices remain near recent highs with all attention turning to this week’s meeting of OPEC+ and the thorny issue of whether the cartel is prepared to expand upon its previous commitments to increase output. Our view is that this might be a wise approach through 2022, one which secures strong pricing for producers but also minimises the risk of oil demand destruction in the global economy.
Hospitality – Lonely Planet namechecks Dublin as airlines announce a busy 2022 summer schedule
This week Lonely Planet named Dublin the 7th best city in the world to visit in 2022, a few weeks after TimeOut named Dublin 8 the 15th coolest neighborhood to live in. Every little helps in the effort to
promote tourism into Ireland in 2022 with this following on from Tourism Ireland’s recently announced partnership with Golf Digest to promote Ireland to golfers across the US. In related news, United
Airlines announced last week that it would resume and grow transatlantic flight numbers between Ireland and the US, starting in March 2022. These announcements, in conjunction with the Aer Lingus
announcement of a busy Irish summer schedule in 2022 provides encouraging signs for the tourism sector as it seeks to bounce back to pre-pandemic levels.
Housing – Strengthening lending impulse should support house prices over the medium term.
This week the Banking & Payments Federation Ireland (BPFI) released its Mortgage drawdown quarterly report for Q3 which saw 11,479 new mortgages with a value of €2.8bn drawn down. This
represented increases of 42% and 25% compared to Q3 2020 and Q2 2021 respectively with first time buyers accounting for a majority of this borrowing. In our view this healthy pipeline of first
time buyer demand together with a stronger lending impulse into the housing sector should support house prices over the medium term, a point we made in our sector insights report on the
housing market in September.
Forestry – New organization seeks to trade carbon credits as the first Carbon budget is announced.
A new organization, the Carbon Removals Action Group (CRAG) was established last week which seeks to allow farmers and plantation owners to monetize and trade carbon credits domestically
and internationally. This organization was established in the wake of the Minister for Agriculture, Charlie McConalogue’s comments surrounding the ownership of carbon sequestered on private
lands, in which he disputed the sequestration rights of foresters and farmers. This organization will legally challenge the government on the rights to trade carbon credits should the matter fail to
be clarified. The first carbon budget was also announced last week which stated that 139,000 hectares of forestry would need to be planted between now and 2030 to meet our reduced emissions
targets. However, with 1000 license applications still awaiting approval and Ireland massively behind its planting targets the pressure is on the Irish government to deliver for the forestry sector.