The substantial rise in energy costs being seen in European economies undeniably represents a headwind to the economic recovery, notably through its negative impact on household spending. In 2015 – the most recent year for which Eurostat data are available – at the aggregate euro zone level direct energy spending represented between 9% and 10% of total household spending, making it the third largest cost item after food and housing. The weight in total consumption of spending on “electricity, gas and other fuels”, which is defined by France Strategy as ‘pre-committed spending’[1], is negatively correlated with the income level of households
Emerging economies have faced mounting inflation pressures since the beginning of 2021. Headline inflation has continued to accelerate over the summer (except in Asia), primarily reflecting the rise in food and energy prices and weaker currencies against the USD. However, core inflation has also accelerated across the board. As a result, a growing number of central banks in Latin America and Central Europe have started to raise their policy rates. In Asia, inflation has remained low (North Asia) or has levelled off (India), allowing central banks to stay accommodative. So far, central banks engaged in a tightening cycle have increased their policy rate cautiously; even the more reactive ones (in countries such as Brazil and Russia) have remained behind the curve (i.e
In response to the Covid-19 pandemic, the US Congress set up the Paycheck Protection Program (PPP) in April 2020 to provide loans backed by the Federal government to small and medium-sized enterprises (SME). When subscriptions closed on 31 May 2021, about USD 800 bn in PPP loans had been issued. Banks originated 80% of these loans and non-banking lending companies and fintechs issued the remaining 20%. Several aspects of this programme differ from France’s state-backed loan programme (PGE), especially its fiscal cost. First, in the United States, the Federal government fully covers the credit risk associated with government-guaranteed loans1. Second, American lenders receive fees to compensate for the cost of originating PPP loans (between 1% and 5% depending on the principal amount)
Since year-end 2020, Eurozone inflation has risen almost vertically. A year ago, year-on-year inflation was still slightly negative, but by September 2021, it had risen to 3.4% (according to Eurostat’s preliminary estimate), the highest level since September 2008. The surge was strongest in Germany, followed by Spain, and to a lesser extent, Italy and France. In Germany, inflation bears the marks of the temporary VAT cut in H2 2020. In Spain, the upturn in energy prices was accentuated by a higher VAT rate on electricity than in most of the other European countries. The updating of weights in the price index also played an important role at the beginning of the year
India’s public finances remain fragile, though strengthening over the first four months of the current fiscal year (to 31 March 2022). The central government’s fiscal deficit hit a high of 9.2% of GDP at the end of the 2020-21 fiscal year from an average of 3.8% of GDP over the previous five years. Over the same period, public debt has steeply risen, and is estimated to have reached a high of 88% of GDP in March 2021. The rapid deterioration of the public finances is the result of increased public spending in response to the Covid-19 crisis, but is also due to an extremely low fiscal base (total government’s receipts only reached 8.6% of GDP even before the pandemic). Under such circumstances, one might have feared a deterioration of the India’s sovereign rating
In the first quarter of 2021 cumulated amounts of state-guaranteed loans (SGLs) granted by euro area banks reached EUR 376.4 bn, from EUR 184.7 bn in the second quarter of 2020. The proportion of total lending to non-financial corporations (which has remained relatively stable) represented by SGLs thus rose from 3.3% to 6.9% over the same period. French, Spanish and Italian banks have made a particularly substantial contribution to supporting economic activity during the Covid-19 pandemic. They granted 90.6% of all SGLs across the euro area (EUR 131.7 bn, EUR 108.7 bn and EUR 100.5 bn respectively) whilst their share of total lending to NFCs was only 57.7% on average between the second quarter of 2020 and the first quarter of 2021
The Greek economy is recovering relatively quickly from the Covid shock of 2020, judging by the GDP and employment figures released in early September. Real GDP grew 3.4% q/q in Q2 and was 0.6% higher than pre-Covid levels. Since the beginning of the pandemic, Greece has reported the fourth strongest rebound in activity among the 19 Eurozone member countries. Even though household consumption remained fragile in Q2 (+0.9% q/q) due to health restrictions, investment was once again solid (+4.3% q/q). Employment has also reached levels unseen for the past 10 years. Although these figures are encouraging, they nonetheless fit within a health environment that is still uncertain, with a vaccination rate in the country far below the EU average
Following the 12 August presidential election in which opposition leader Hakainde Hichilema defeated incumbent President Edgar Lungo, Zambia’s macroeconomic situation has become clearer thanks to progress towards strengthening relations with the IMF with a long-awaited loan agreement on a financing programme in the coming months. External liquidity has increased with the new allocation of Special Drawing Rights (SDRs) on 23 August 2021. The allocation amounts to USD 1.3bn, the largest amount behind South Africa, Nigeria and DRC. FX reserves now account for 7% of GDP and cover around 4.7 months of imports, up from 2.5 months before the allocation
On 28 July, the US Federal Reserve (Fed) announced that it would establish a Standing Repo Facility (SRF). Each eligible counterparty* will now be able to borrow, every business day and on an overnight basis, up to USD 120 billion of central-bank liquidity as part of the SRF**. Operations will bear interest at the marginal lending facility rate (25bp) and be capped at USD 500 billion.The SRF gives the Fed a new tool for detecting possible central-bank money shortages. In September 2019, the system was introduced on an emergency basis and temporarily, and helped to ease the repo markets crisis
To determine whether the French labour market has returned to good health, we can use the two gauges retained by the French government in the unemployment insurance reform: 1/ the number of “category A” jobseekers must have decreased by at least 130,000 over six months; 2/ hiring reports for jobs lasting more than 1 month (excluding temporary work) must also exceed a 4-month moving average of 2.7 million contracts. In June 2021, both these criteria were met. The improvement is less surprising for hiring reports than for registrations with the “Pôle Emploi” employment service, with the bar seemingly more easily reachable for the former than for the latter. This first positive sign[1] still needs to be confirmed over the coming months but things seem to be on the right track
The Covid-19 crisis is expected to have a lasting negative impact on potential growth in the emerging countries. IMF economists are forecasting per capita GDP growth of only 2.5% in 2025. Granted, that is higher than the 1.8% annual average over the past decade, but it is far from the 4% growth rates of the early 2000s, during which the emerging countries were buoyed by a commodity super cycle. Can we hope to see a repeat performance? It seems highly improbable. According to our estimates, even using a scenario of a new price cycle, potential growth in the Latin American countries—all commodity producers and exporters to various degrees—is unlikely to exceed 3% by 2025
The Banker’s rankings of the UK’s five largest banking groups by Tier 1 capital – HSBC, Barclays, NatWest (formerly RBS), Lloyds and Standard Chartered – have generally declined since 2013. This trend, which was initially in step with all of the largest European banks, mainly due to differences in growth rates between geographic regions, has been even sharper in the UK since the vote for Brexit in 2016. HSBC almost maintained its ranking, thanks to its geographic diversification. The decline in the rankings of the UK banks can be attributed to the absolute decline in Tier 1 capital (-12.6% between 2013 and 2020), but also to the increase in the Tier 1 capital of the other largest euro area banks (+29.6%)
With the onset of the Covid-19 pandemic, the labour force participation rate – the percentage of the population who are working or seeking employment – dropped to an all-time low in April 2020: barely 74% of the 20-64 age group, which is unprecedented for the United States. Although it has picked up in recent months, it still has not returned to pre-crisis levels. Nearly 3 million Americans who were active in the labour force prior to the pandemic have disappeared from the ranks. The workers who have “fallen off the radar” are mainly from low-skilled, low-paid social categories. According to the Bureau of Labor Statistics, people with a high school education or less make up only 30% of the active population, but account for 75% of the post-Covid collapse
Close to 2/3 of public debt in Central America* is owed to non-residents. Costa Rica is the least dependent on external funding. Nicaragua and Panama are the most dependent – however with diametrically opposed creditor profiles. The former’s external commitments are due to official creditors (e.g. multilaterals or bilateral creditors such as Taiwan) while ¾ of the latter’s are owed to private creditors (primary bondholders) – a share comparable to Latin America’s third largest sovereign bond issuer in 2020 – the Dominican Republic. In a context of increasing debt burdens (+12 percentage points across the region in 2020), a high dependence on external funding is a source of financial vulnerability – especially for those countries whose external debt is mostly held by private creditors (e
On 16 June, the US Federal Reserve (Fed) extended its temporary swap agreements through 31 December 2021*. This facility, which offers foreign central banks the possibility of obtaining dollars from the Fed and then lending them to local commercial banks, is not being drawn on much today, but it did help alleviate global pressures on the USD liquidity due to the Covid-19 shock. These swap agreements had already been set up during the 2008 financial crisis, albeit in a distorted manner, since they were largely used as a substitute for the discount window. In the end, most of the liquidity lent by the Fed as part of these swap agreements was lent out again to the US branches of foreign banks to counter the abrupt drying up of the USD short-term debt market
Despite a sharp increase in May (+1.98%), eurozone inflation continues to be driven by two components of the consumer price index (CPI) that are linked to energy prices. “Operation of personal transport equipment” was by far the biggest contributor to the rise in the CPI with a contribution of 0.87 percentage points (pp), or nearly half of headline inflation. This reflects the increase in pump prices. It is followed by “Electricity, natural gas and other fuels”, which contributed 0.43 pp to Eurozone headline inflation
The improvement in global growth prospects and the success of the vaccination campaign have helped sustain the recovery in Chile’s growth seen since Q3 2020, despite the reintroduction of relatively strict health protection measures in the early part of 2021. Household consumption grew strongly and is likely to continue to drive growth, boosted by stimulus measures and the opportunity given to a large number of employees to draw on their pension savings. In all, GDP is likely to grow by 6% in 2021, after a 5.8% drop in 2020. This said, the risks are on the downside. External risks relate mainly to trends in the pandemic and progress in vaccination on a global level
One year after the introduction of State-Guaranteed Loans (SGLs), 39% of managers of the SMEs that took them out have indicated that they have made little or no use of the funds, whilst barely one-third stated that they had used the majority of their loan. This precautionary behaviour led companies to hoard all or part of their SGL in order to build up a liquidity reserve under favourable terms. Meanwhile, the share of managers who expect to repay their loans in full over several years has increased (41% in September 2020 to 56% in April 2021), whilst the proportion expecting to make at least partial repayment in 2021 has decreased (from 36% to 23% respectively)
In Sweden, the economy continued to rebound in the first quarter with GDP up 0.8% q/q, driven primarily by exports, inventory building and an upturn in household consumption. On a year-on-year basis, growth is about to swing into positive territory (-0.1% y/y in Q1 2021). Confidence surveys suggest that the recovery is only just beginning. According to the European Commission, the business climate in industry has surged over the past two months to a record high since the creation of the survey in 1996. It also improved strongly in services. Consumer confidence has also picked up, albeit not quite as robustly
Foreign investors have significantly increased their purchases of Chinese local bonds since Q2 2020, targeting sovereign papers particularly. In fact, foreigners are currently holding only 3% of the total stock of Chinese local bonds, but 10% of the total stock of central government papers. Foreign investors’ holdings of local bonds increased by RMB 120 bn per month in average from April 2020 to February 2021, against +RMB41 bn in the previous twelve months. This dynamic suddenly stopped last March. It should resume in the short term, yet without returning to the 2020 levels. Several factors account for these recent foreign investment flows: the increase in local yields and the widening spreads with US Treasury yields (yields on Chinese ten-year sovereign bonds rose from 2
Having been rising for several years now, non-financial company (NFC) sight deposits have been boosted to new record levels in the euro area under the influence of the health crisis and government measures to support company financing. Their outstanding amount reached EUR 2,591 bn for the euro area as a whole in March 2021 (of which 26% in France, 23% in Germany, 14% in Italy and 11% in Spain)
The increase in supply side difficulties identified by INSEE’s economic surveys in April 2021 requires a closer look. It is to be hoped that it will not hold back a recovery that is only just beginning to take shape. The rise has been particularly noticeable in the industry sector and has mainly been blamed on procurement problems that significantly exceed average levels from past years. In the construction sector, a shortage of labour has been the main difficulty (as it was before the crisis) but procurement constraints have also increased sharply. In the services sector, supply side difficulties relate primarily to health protections measures. In this sector however, demand side problems are affecting a greater number of companies
Growth in Central Europe looks set to accelerate in the 2nd quarter of 2021, after already a good performance in the 2nd half of 2020, as indicated by the capacity utilisation rate in the manufacturing sector. This highlights good resilience despite a shortage of chips in the automotive sector and a fairly severe 3rd wave of Covid in the 1st quarter of 2021. Improving business conditions in the industrial sector stem from the on-going recovery in demand, specifically for exports: this has already allowed economic activity in the Czech Republic and Slovakia to move above pre-Covid levels, whilst the Polish and Romanian economies have returned to around pre-crisis levels. This performance should allow the region’s GDP to recover its pre-Covid levels before the end of 2021 (growth of 4
Given the way outstanding amounts of equity and debt are valued[1] in national financial accounts[2], debt ratios calculated using these figures can give a distorted picture of the financial structure of non-financial companies. In contrast, capital increases and self-financing give a reliable approximation of changes in company capital. Our calculations suggest that French companies went into the pandemic in a strengthened financial position. Thus, the unprecedented increase in financial debt in 2020 (EUR 206 billion, with nearly EUR 130 billion in the form of government-guaranteed loans) was preceded, between 2015 and 2018, by a marked rise in capital, as the result of a significant increase in equity issues
Japanese exports rose by 16.1% year-on-year in March 2021, after declining by 4.5% the previous month. This has been the biggest increase since November 2017. Although this strong performance partially reflects a positive base effect – Japanese exports were hard hit by the pandemic in spring 2020 – it was nonetheless much higher than the consensus expectations, which anticipated a 11.6% growth. Broken down by destination, Japanese sales abroad increased in the large majority of countries worldwide, especially in China, its leading trading partner, where Japanese exports were very buoyant last month (+37.2% year-on-year in March). Globally, the strong performance of Japanese exports takes place in a context of international trade improvement and of a strong rebound of the Chinese economy
Weekly charts highlighting points of interest in the world economy
