The post-Covid boom is already over: now we’re waiting for the downturn

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As the FT has noted this morning:

A top Federal Reserve official has warned the spread of the Delta coronavirus variant and low vaccination rates in some parts of the world poses a threat to the global recovery as she urged caution in removing monetary support for the US economy.

May Daly is the president of the Federal Reserve Bank of San Francisco.  Her suggestion is that anyone declaring premature victory over Covid has it wrong.

In the same paper it is noted that:

Stock markets dropped on Thursday on rising concerns about prospects for the global economy, following days of sharp moves in government bonds that hinted at slower growth and inflation than previously expected.

Robert Armstrong also notes in the FT that in little over a week US ten year Treasury yields have dropped from about 1.52% to just over 1.3%.

There has been no big economic news to make that happen. What there has instead been is a breaking of the hype that I have long criticised, which said that the pandemic was over and boom times, plus inflation, were on their way. They are not. The delta variant is what is happening instead, with other variants (no doubt, I am afraid, given the way the UK government is managing the crisis) to follow. And now markets have realised that.

As I have said, time and again, that means economic reopening is now becoming a nightmare. Withdrawing support for markets, as is happening in the UK at full tilt now, is a mistake on an epic scale, and economic downturn and even deflation are more likely than upturn and inflation at present.

It seems that markets now agree with me. I welcome the return of some sanity in them, even if the return only confirms how irrationally exuberant markets can be.

What I do not welcome is the economic stress to come. That is avoidable. But will a UK government now dedicated to cost cutting and passing the burden of Covid onto the UK population whilst washing its own hands of responsibility for it take the necessary steps to help the economy? I doubt it. The Javid / Sunak alliance that now dominates government thinking is not going to permit that. The consequences could be very ugly.