A complex interplay between unit labour costs, profit margins and pricing power will determine whether the current increase in inflation will be longer-lasting. Traditionally, in the early phase of a recovery, unit labour costs decline on the back of increased productivity. This should cushion the impact of higher input prices on profit margins. Subsequently, unit labour costs should increase but this does not imply that margins should decline. Given the strength of the growth acceleration, the fact that alternatives for meeting robust demand often do not exist and that going for market share makes no sense when faced with supply constraints, the conditions seem to be met for a rather significant transmission of higher input prices in producer output prices.
Indicators related to international trade remain very strong. Even though the most recent CPB figures are for March, world trade in volumes (both exports and imports) increased 2.2% m/m, pushing the quarterly rise to 3.5% in Q1 2021. This represents a solid growth that was almost identical to that recorded in the previous quarter.
The easing of the pandemic has continued for the fifth consecutive week across the world. The acceleration of vaccination programmes has allowed a gradual reopening of economies. Visits to retail and leisure facilities continued to rise in the main developed economies, marking a return nearly to normal in the week of 28 May to 8 June.
Our different uncertainty gauges are complementary, in terms of scope or methodology, yet, based on the latest readings, they all point towards a reduction in uncertainty. Such a uniform, positive message is quite unique.
Visits to retail and leisure facilities continued to rise in the main advanced countries. The biggest increase in the week came in France. The improving trend has had a visible impact on the service sector, as can be seen in the latest service sector PMI.
Strong belief in the quality of central bank economic forecasts enhances monetary transmission and hence the effectiveness of monetary policy. In the current environment of rising inflationary pressures, the belief of market participants that central banks have better forecasting skills should limit the rise in inflation expectations. Research casts doubt on whether such a belief is warranted. Although Fed staff projections tend to have lower forecast errors than private sector forecasts, the difference has narrowed since the 1990s. In the Eurozone, forecast errors for inflation of the Eurosystem/ECB staff projections were equal to those of the Survey of Professional Forecasters.
With the fall in Covid-19 cases and rising vaccination levels, retail and recreation mobility continues to rise. Only Belgium saw a decrease last week, but its level remains the highest in Europe. In the US, mobility is almost back to normal. However, it is continuing to decrease in Japan, with the seven-day moving average down 22% compared with the reference level.
In countries where restrictions on mobility are lifted, demand picks up suddenly, causing an imbalance with supply, which takes more time to react, in particular when value chains are long and complex. In recent months, companies have been reporting longer delivery lags and rising input costs, but the historical experience in the US and the euro area shows that the impact on inflation should be temporary and limited. Nevertheless, in bond markets, break-even inflation has increased significantly in recent months, reflecting investor worries about the risk of upside surprises to inflation. Should supply-side pressures ease in coming months, one would expect break-even inflation to decline as well.
The Covid-19 pandemic continues to slow around the world. As health protection measures are gradually relaxed, footfall to retail and leisure facilities continued to rise in the main developed economies.
World trade in goods has rebounded very strongly, even though major divergences exist between regions due mainly to widely contrasting health and economic situations. The turnaround in services exports has been much slower, with transport and tourism still holding at very low levels. Trade in information and communication technology (ICT) services was much more resilient in 2020. Brexit triggered a sharp increase in the number of new trade agreements in 2021. Two major trade agreements negotiated by the European Union are still pending, one with Mercosur and the other with China. Negotiations between the United States and China are also at a standstill after the failure of bilateral talks held in Alaska in mid-March.
Working from home is expected to have a positive impact on the level of productivity but will it also influence its growth rate? The answer largely depends on what happens to innovation. Interaction between people is key for idea generation and the exchange of information. Formal interaction can be easily organized using a variety of software applications but informal interaction is a bigger challenge. To make sure that serendipity within and amongst teams – given its importance for a culture of innovation – is maintained, a combination of working from home and onsite seems to be recommended.
According to the latest figures from Johns Hopkins University, 5.5 million new Covid-19 cases were recorded around the world in the week of 4-10 May, a 12.5% drop from the previous week. This fall was seen in Europe (-16.5%), Asia (excluding India, -14.5%) and the Americas (-6.3%).
Sentiment in the manufacturing sector improved further at the global level, driven by better numbers in the majority of advanced economies – where very high levels have been reached – whereas the picture is mixed in emerging countries. Nevertheless, in this part of the world as well, the PMIs are above the 50.0 mark, with the exception of Mexico.
The situation in India continues to deteriorate with 382,146 new Covid-19 cases reported on 4 May alone, which has lifted the total to more than 20 million cases since the beginning of the pandemic. In Asia (excluding India), Europe and the Americas, the number of new cases continues to decline.
One of the lasting consequences of the Covid-19 pandemic will be the way we work with more time spent on working from home compared to the pre-pandemic situation. Clearly, the possibility to do so depends to a large extent on the industry, the nature of the job but also the country. These developments would have profound implications on where people decide to live, the role of cities, the need for office space, the use of means of transport, the needs in terms of IT infrastructure (high-speed internet), etc. A priori, one would expect a positive impact on productivity, in particular due to increased worker satisfaction and efficiency. Based on recent surveys, that is also what companies seem to expect
The Covid-19 pandemic continues to set records, with 825,721 new infections recorded on 28 April alone. Much of this surge has occurred in India, where there were 349,378 new cases, or 42% of the global total, whilst in the rest of Asia, Europe and the Americas we have seen a fall in the number of new cases over the past few days.
In the retail and leisure sectors, which are still hit by health restrictions, footfall improved in developed countries during the week of 9-16 April compared to the previous week, especially in the UK, which reported a big improvement in footfall (from -51% to -34% compared to the baseline*). This can be attributed to the reopening of bars and restaurants on 12 April. Footfall also improved in Italy (-51% to -40%), Germany (-47% to -40%) and Belgium (-43% to -38%). In France, footfall increased very slightly and is still the lowest in Europe (chart 3).
The Covid-19 pandemic is having a profound impact on household expenditures. The volume has dropped and its composition has changed significantly. As restrictions are gradually lifted, services such as recreation, food services and accommodation, which have seen a big reduction in demand due to the restrictive measures, could thrive, to the detriment – at least relatively speaking – of spending on goods. For the strength of the early phases of the recovery, pent-up demand is an important factor. It plays a smaller role in the services sector, which could mean that countries with a larger services sector not only have suffered more from restrictive measures but could also face a bigger challenge during the recovery.
Most of our uncertainty indicators continue to decline on the back of vaccination campaigns that pick up speed and better economic data, although in several countries the number of new infections is again rising strongly. Starting top left and moving clockwise, the number of references in the media to uncertainty, after declining very strongly in recent months, has now more or less stabilized.
Faced with the resurgence of the pandemic, retail and leisure footfall declined in the developed economies, especially in Europe, during the week of 4-11 April. Moreover, the OECD Weekly Tracker of annual GDP growth continued to decline in Europe.
Central banks have become increasingly aware of the impact of climate change on price and financial stability. Moreover, by accepting collateral or via asset purchases, central banks are taking explicitly climate risks on their balance sheets. At the European Central Bank, climate change has become integral part of the monetary strategy review launched in 2020. A major question is whether climate objectives should be pursued in the conduct of monetary policy. The fear is that it could be seen as “mission creep”. At a minimum, one would expect the ECB to ask for more disclosure concerning climate-related factors for assets held on its balance sheet. But the question to what extent market neutrality should be abandoned in favour of greener objectives is still open
In the manufacturing sector, with a few rare exceptions like Mexico, Egypt and Lebanon, virtually all the countries in our sample reported PMI above the 50 threshold in March 2021. Global manufacturing PMI rose to the highest level in the period under review. The same can be said for the Eurozone, where the index rebounded strongly again in March.
The global pandemic continues to worsen as the number of new Covid-19 cases continues to rise. In the week of 1-7 April, more than 4.14 million new cases were reported*, a 23% increase over the previous week. Increases were observed in Europe, Asia, excluding China, and the Americas, up 12%, 51% and 15%, respectively. In Europe, however, the growth rate of the new infections is on a declining trend over the past week.
In many countries the number of new Covid-19 cases has begun rising again, forcing governments to maintain or tighten health restrictions. This is the case for the Eurozone, among others, where a true rebound in growth and demand has been postponed yet again. The timing of the recovery will depend essentially on the effectiveness of restrictive measures and the acceleration of vaccination campaigns, but also on spillovers effects with some of its trading partners whose economies are picking up more rapidly. The United States is one such country thanks to its successful vaccination campaign and the enormous recovery plan that has just been launched. America’s influence is not limited to providing greater opportunities for European exporters
Since the Great Recession, the monetary base in several advanced economies has seen a considerable increase, driven by the creation of bank reserves at the central bank. Yet, contrary to what had been observed in previous decades, this has not been followed by a significant pick-up of inflation. Following the global financial crisis, the demand of the banking system for central bank reserves increased a lot. This was a reflection of the dire state of the economy and money markets as well as tighter liquidity requirements. Subsequently, quantitative easing caused an increase in reserves on the initiative of the central bank
