Client Update - 18th June 2021

Freedom Day is off, at least for 4 more weeks. As we are advised the Government is led by the data, I suppose this was no great surprise. Looking at the roads (more like car parks) around the West Country, it does not really feel like the news has had much impact on UK based travel at least. The rise of the Delta variant has put paid to many travellers hopes of setting off overseas in July, although news is emerging that maybe “double dosers” may be allowed to travel to countries on the amber list after all.

The G7 last week truly turned the page on the populistic and dramatic “Trump era”. Observers were quick to criticize the lack of ambition in terms of concrete commitments, but even successful G7 meetings merely set the tone and give general policy directions rather than produce immediately implementable action. The flavour from Cornwall was of the “liberal/progressive” variety. Beyond the obvious focus on the pandemic, fighting climate change, free and fair trade and inclusive growth, were the common leaders ‘priorities beyond their political diversity. On economic policy, the West is more unified and can more easily project its values on the international stage through renewed multilateralism. I wanted to use that phrase but I did have to check what it meant. In International relations, multilateralism refers to an alliance of multiple countries pursuing a common goal and this was evident last week. Still, many policy directions agreed at the G7 will need to pass the “G20 test”. From this point of view, China is the “elephant in the room”. The tone on China was “firm” but very vague on any concrete follow-up. While Biden has managed to narrow the gap with Europe on this issue, nuances still abound. Maybe more fundamentally, while the West may be back “ideologically”, the crucial question is whether it will have the financial resources to win the argument at the global level. The G7 countries are exiting from the pandemic with high levels of debt and lots of internal grievances to tend to, while China is emerging with much of its fiscal and monetary capacity intact.

The “Cornwall consensus” can thrive only if central banks are not forced to pull too hard on the brakes. Reassuringly, the market is remarkably non-plussed by the further spectacular acceleration in US inflation. For the time being, the US Federal Reserve (FED) can comfortably maintain its patient stance, although the announcement on Wednesday of possible interest rate rises at the front end of 2023 was an earlier estimate than expected.

In the months ahead we will focus on any sign of “contagion” from short term inflation to a longer-term concern, but our baseline has not changed: while inflation is unlikely to return to its sub-par pre-pandemic pace (which would be a good thing), we see little reason to shift away from the “transitory shock” narrative. Have a good weekend.