US GDP growth for the first quarter of 2021 was released last week, showing that the world’s largest economy expanded +6.4% year-over-year (YoY), with personal consumption rising +11% YoY, the highest growth rate seen in this metric since the 1960s. This brings total US economic output back to its pre-pandemic levels. US equities hit new all-time highs following this strong economic data release, and corporate earnings are supporting this bullish sentiment. Of all US companies that have reported results so far this earnings season, 75% have beaten expectations.
Predictions for Q2 2021 US GDP growth are for another blow-out quarter as we lap the lows of 2020, with +10% growth expected. The continued acceleration of vaccine roll out, fast re-opening and fiscal support from the government are combining to drive what is looking like the strongest economic recovery of any developed world nation.
Profits at Chinese industrial firms rose by +137% YoY in the first three months of 2021 – a clear indication that the country’s recovery is roaring ahead. However, it continues to face international trade issues, a risk which pre-dates the pandemic. Australia has now scrapped agreements made as part of China’s ‘Belt and Road’ initiative in an effort to “protect its national interest”. Australia has not been afraid to take tough stances with its biggest trading partner recently. It has backed an independent probe into the origins of COVID-19 in 2020 and banned Chinese telecommunications companies from its 5G network in 2018. In response to this latest move, China has applied new tariffs to a number of Australian export goods and ratcheted up its rhetoric.
This mirrors the increasingly fractious trade relationship between China and the US before the pandemic. The issue of how China trades with the developed world remains unresolved and will continue to be a risk which investors should be cognizant of. From the perspective of assessing market risks, we welcome the prospect of putting the pandemic in the rear-view mirror and returning to focussing on issues like trade and geo-politics.
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