Euro Down as ECB’s Lagarde Signals Allowing Inflation to Overshoot 2% target

The euro dollar declined against the pound yesterday after the European Central Bank (ECB) President Christine Lagarde hinted that the ECB will align with the policies of the US Federal Reserve and allow the inflation to overshoot the 2% objective established in 2003 when there were concerns about rapid price increases.

The Eurozone economic data, however, was mixed with the German retail sales and French consumer spending beating estimates, while the French preliminary CPI lagging behind economists’ forecasts. Similarly, the UK’s economic data was also mixed, with most of the key measures igniting concern about the state of the economy.

According to the UK’s Office for National Statistics, the country’s current account deficit narrowed to £2.80 billion in the second-quarter, from £20.80 billion in the earlier quarter and missing economists estimate of £1 billion deficit.

Still, the reported deficit is the lowest since the second-quarter of 2011, when it was a mere £2.50 billion. The underlying current account deficit, barring non-monetary gold and other precious metals, decreased £7.50 billion to £12.10 billion, translating to about 2.5% of GDP, in 2Q20.

During the second quarter, total exports stood at £140.10 billion, while imports were £123.20 billion. It is the lowest level since the second quarter of 2016. The restrictions imposed in the second-quarter to limit the spread of Covid-19 severely affected shipment of finished manufactured goods, in addition to travel and transport services.

The primary income deficit fell by £4.30 billion to £10.50 billion in the second-quarter, primarily due to a steep decline in payments to overseas investors for their investments in the UK.
The UK financial account posted net inflows of £28.90 billion in the second-quarter as the UK residents slashed their overseas assets by £260.70 billion, while non-residents trimmed their UK investments by £231.80 billion.

Overall, in the June quarter, the value of the UK’s net liability widened mildly to £494 billion, from £483 billion in the first-quarter as the UK residents and non-residents trimmed their overseas assets by almost equal amounts.

According to the ONS, for the second quarter in a row, the UK’s economy contracted 19.8% in June quarter, after declining 2.5% in the March quarter. Economists did not anticipate any change in the previous GDP estimate of negative 20.4%. It is the largest quarterly contraction in the UK economy since the institution started documenting data in 1955.

On y-o-y basis, the UK economy shrank by 21.5%. Between 2018 and 2019, the country’s GDP was estimated to have increased by 1.3%. It was downwardly revised by 0.2%.

Services, production and construction output posted record declines in the second-quarter. Broadly speaking, industries which faced government restrictions delivered huge negative growth.
The households’ savings ratio surged to a historical high of 29.1% in the June-quarter, compared with 9.6% increase in the earlier quarter.

In separate news, the ONS stated that business investment (revised) declined 26.5% q-o-q in the second-quarter. The earlier estimate pegged the decline in business investment at negative 31.4%. Economists had anticipated no change in the revised business investment.

In Europe, French statistical organization INSEE stated that consumer spending increased 2.3% m-o-m in August, following a decline of 0.9% in the earlier month. Economists had anticipated consumer spending to decline by 0.2% in the reported period. On y-o-y basis, consumer spending rose 2.4% in August 2020. Food purchases recorded a growth of 2.4%. Likewise, manufacturing goods posted a growth of 3.6%.

Durable goods, however, reported a decline of 1.5%, mirroring the second successive drop. Transport equipment procurement fell 7.3% and led the decline in durable goods. On the contrary, housing equipment consumption rose sharply by 6.2% in August, after declining 10.1% in the earlier month. Also, textile-garment purchase rebounded sharply by 17.4%, after recording a negative growth of 1.7% in July.

The statistical organization also stated that consumer price index (CPI) declined 0.5% (preliminary estimate) m-o-m in September, following a decline of 0.1% in the earlier month and worse than the 0.3% drop anticipated by economists. On y-o-y basis, consumer price index increased 0.1% in September. In August, the CPI rose by 0.2% on y-o-y basis.