The victory of the Liberal Democratic Party in the October general election allows prime minister Kishida to implement his policies. In November, he presented an unprecedented fiscal package amounting to some JPY55.7trn or 10% of GDP. In 2022, GDP growth could rise to 2.6% after 1.7% in 2021, largely driven by private consumption.
The resurgence of the Covid-19 pandemic and the emergence of the new Omicron variant make the ECB’s task even harder. Although growth should hold at a high level, it is expected to ease, and this trend could worsen, at least in the short term. Meanwhile inflation continues to soar, while becoming more broadbased, and the risk in the coming months is on the upside. Faced with greater uncertainty, the ECB is arguing in favour of patience and constancy while saying it is ready to act in any direction. According to our scenario, which is somewhat optimistic in terms of growth and calls for persistent inflation, the ECB would end its Pandemic Emergency Purchase Programme (PEPP) in March 2022 and begin raising its key deposit rate in mid-2023.
After strong growth in Q2 and Q3, the business climate deteriorated due to supply problems, the increase in prices and the surge in Covid-19 infections. Output is likely to stagnate around the turn of the year. The new government will put the emphasis on social and environmental policies, while fully respecting the fiscal framework, important for Germany. Private consumption will be the major engine for growth in 2022.
Factors hampering growth in the short term are gaining strength (supply chain disruptions, surging inflation, and the resurgence in the Covid-19 pandemic), but the resilience of business sentiment through November as well as numerous targeted measures to support household purchasing power help allay fears. In Q4 2021, we are forecasting growth of 0.6%, although the risk is on the downside. In full-year 2021, growth is expected to average 6.7%. In 2022, it will remain a robust 4.2%, bolstered by the accommodative policy mix, the unblocking of excess savings, the catching-up of the services sector as well as strong investment and restocking needs.
After a modest expansion in Q1 2021, real GDP rose by more than 2.5% q/q in both Q2 and in Q3. This recovery was widespread. In Q3, net exports added 0.5 percentage point to GDP growth thanks to a stronger rise in exports than imports. Thanks to the easing of social restrictions, consumption has further increased, while favourable financing conditions and fiscal incentives have supported investment. During the summer, the recovery expanded to the services sector, which benefitted from higher tourist receipts. Manufacturing production has recovered entirely from the 2020 decline, ending up 2% higher than in Q4 2019. Labour market conditions are not as good as the recovery would suggest.
Despite a rather weak recovery in GDP, the Spanish economy has been much more resilient on the labour market front in 2021. Employment (November) and the participation rate (Q3) are at record levels. Inflation will be one of the biggest obstacles in 2022, the increase in production prices having accelerated markedly this autumn. Support for growth will remain a government priority in 2022. The country will benefit from a larger transfer of European funds that will help finance a record budget of EUR196 billion. The reduction in the government deficit will be again pushed into the background, the authorities mainly betting on economic growth to reduce the deficit-to-GDP ratio.
Q3 Belgian GDP growth came in at 2% q/q, which is well above consensus. GDP thus exceeded its pre-Covid level for the first time since the start of the pandemic. For this year, we estimate the growth rate to reach 6.1% in annual average terms, with a slower but still above-potential growth rate of 3.1% expected for next year. As it stands, the Belgian economy looks to have avoided additional scarring; however, with elevated public debt levels entering the limelight once again, the De Croo government has its work cut out.
Once Covid-related restrictions are lifted, the economy is projected to rebound strongly in 2022, driven initially by household consumption. Next year, the fiscal stance is likely to tighten because of the gradual withdrawal of the special support measures. A major political risk is the possible falling apart of coalition between the conservative ÖVP and the Greens.
Confronted like the rest of Europe by an upsurge in Covid-19 cases, Finland has reintroduced protective health measures that could temporarily dampen its recovery. Estimated at 3.4% in 2021, GDP growth could still reach 2.8% in 2022 according to the European Commission. After taking a reasonable approach to “whatever the cost”, the government is now seeking to consolidate public finances.
The Greek economy has surprised on the upside so far in 2021. Real GDP growth is expected to exceed 7% this year. The unemployment rate has fallen to 13% in September. This improvement has allowed the banking sector to continue its clean-up, with a non-performing loan ratio close to the 20% threshold at the beginning of the summer. Difficulties on the economic, social and banking front remain amongst the most pressing in the European Union. This said, unless there is a further complication on the health front, Greece will go into 2022 on a much better basis than in previous years.
To raise or not to raise interest rates? That is the question facing the Bank of England as inflation accelerates and the number of Covid-19 cases surges again, this time with Omicron, the new Covid-19 “variant of concern”. After rebounding strongly through summer 2021, economic growth has also lost the support of public spending, and is showing a few signs of levelling off.
Faced with the Covid-19 pandemic, Norway managed to minimise the human toll as well as its economic losses. In 2021, the country largely benefited from the rebound in natural gas and oil prices. Activity has already exceeded pre-pandemic levels, the housing market is booming, and the public accounts have swung back into their usual surpluses. One of the very first central banks to raise its key rates, Norges Bank esteems that the current situation is in keeping with the normalisation of monetary policy. Yet the roadmap still depends on the health situation, which like elsewhere in the world, is deteriorating.
Recent data show business and consumer sentiment has peaked and real GDP growth is expected to slow down whilst remaining well above potential. A key factor in this respect is the self-reinforcing interaction between spending, company profits and employment, against a background of easy monetary and financial conditions. In using the popular metaphor, until recently, the economic sky looked quite blue but clouds have been gathering. The message of central banks should become a bit more hawkish, in the US, political disagreement influences the economic agenda of the Biden administration and China is going through a major adjustment phase
On the whole, the US economy has recovered very quickly, albeit unequally, from the loss of business caused by the Covid-19 pandemic. Exceptional Federal transfers have fuelled a spectacular rebound in private consumption, so much so that it is nearly overheating. Faced with a global parts shortage and hiring troubles, companies are having a hard time meeting demand. Prices have come under pressure. For the US Federal Reserve, the time has come to begin withdrawing monetary support. The debt ceiling has just been hit, and major budget bills remain in suspense until an agreement to raise the limit can be reached with the Republicans.
The Chinese economy is in the midst of a period of major adjustments. They arose after Beijing tightened regulations in a variety of sectors, from housing to certain new technologies and activities linked to the societal challenges facing the country. The adjustments can also be attributed to the debt excess problem of some state-owned and private enterprises, and reflect the authorities’ determination to tighten their access to credit and to clean up practices in the financial sector. As a result, an increasing number of corporates is defaulting, and the troubles of the property developer Evergrande are symptomatic of the changes under way
The economy is likely to rebound in Q4 as health restrictions are being eased. Moreover, despite supply chain disruptions, the manufacturing sector should profit from the worldwide recovery. The consumption boom is likely to peter out soon, as wages growth is to remain sluggish. The main domestic support will come from the government spending, backed up by Bank of Japan (BoJ) ’s yield curve control policy, and business investment thanks to improved profitability. Prime Minister Suga’s resignation, although welcomed by financial markets, has rekindled fears that Japan may return to the “revolving door” era, in which the country changes prime minister every year.
After rebounding vigorously in Q2 (+2.2% q/q), GDP growth is expected to maintain the same dynamic pace in Q3. Admittedly, supply-side constraints have just chipped away a few tenths of a percentage point of growth from our June forecast. September’s business climate surveys are showing more traces of these tensions, especially in industry, and in Germany in particular. Even so, the survey results are still holding at high levels. Growth in the Eurozone will get a boost from the monetary and fiscal accommodation, the freeing of forced savings built-up by households, the recovering job market and the need for investment. We expect 2022 growth to be slightly higher than in 2021 (5.2% and 5%, respectively, in annual average terms)
After a strong recovery in Q2 and Q3, activity in the coming months could slow due to supply disruptions and sharp rising input prices. After his victory in the legislative elections, Olaf Scholz enters negotiations with the Greens and the liberals on forming a new coalition. The policies are likely to focus on protecting the environment and raising low wages. At the European level, the policies of the new coalition should not be very different from those of Angela Merkel.
Despite April’s lockdown, French GDP rose strongly in Q2 2021, up 1.1% q/q. The lockdown’s negative impact was very mild, and the economy rebounded strongly in June. Q3 growth is expected to reach 2.2% q/q, on the one hand buoyed by Q2 strong momentum, but on the other hand curbed by the supply-side constraints at work. In business climate surveys, optimism still prevails, although it has been fading since June. In Q4, GDP growth is expected to virtually close the gap, covering the last percentage point before economic activity returns to 100% of pre-crisis levels. This would bring average annual growth to 6.3% in 2021. In 2022, GDP growth is expected to return to more normal levels although it will remain strong, bolstered by the fiscal impulse
The economic recovery has gradually gained momentum, becoming increasingly more widespread for various components and sectors. The improvement in the overall scenario has boosted optimism among companies, supporting business investment. While manufacturing activity had begun to increase in H2 2020, the services sector benefited from an upswing in consumption in Q2, despite the still disappointing international tourism trends. A wind of surprising optimism continues to blow through the Italian real-estate market, driven mainly by home purchases by many families keen to improve their housing conditions. In Q2 2021, residential sales recorded +70% growth compared to Q2 2020, and +26.1% compared to Q2 2019.
After the disappointing economic growth reported in H1 2021, Spain should record a robust rebound in activity in H2, assuming the health situation does not deteriorate. The inflow of tourists has picked up (but remains historically low) and employment has recovered. Yet inflationary risks are intensifying. With the surge in energy prices, the government was forced to take drastic measures to reduce the energy bill for households, which will weigh on public finances. Faced with a persistently uncertain environment, the government is bound to maintain an expansionist policy when it unveils its 2022 budget this fall, even though the health situation is more favourable for the moment thanks to the high level of vaccinations
Following the gradual lifting of health restrictions, the economy rebounded strongly in Q2 and this dynamism continued in Q3. Despite the favourable economic climate and the satisfactory state of public finances, the political parties are still struggling to form a government even six months after the legislative elections. Nonetheless, the outlook remains bright, especially thanks to the rapid expansion of world trade.
Belgian GDP increased by 1.7% in the second quarter. Consequently, quarterly GDP came within 2% of its pre-covid level. We expect full year growth to come in at 5.5% this year, slowing down to 3.0% in 2022. Increased government spending helped stave off worse outcomes for the labour market and Belgian firms, which resulted in a quick rebound in investment-related spending by all sectors. Private consumption is rebounding more gradually against a backdrop of GDP growth slowing down.
Portugal’s vaccination campaign seems to be paying off. It is the country that has vaccinated the most people in Europe – and one of the most advanced in the world – with nearly 85% of the population fully vaccinated at the end of September. The number of Covid-19 cases has fallen sharply after a surge in June-July due to the spread of the Delta variant. Portugal’s economic recovery was slower than in most of the other European countries through Q2 2021, in part because it was hit by a more severe wave of the pandemic last winter. However, employment and housing activity have picked up strongly. As in several European countries, new risks have arisen as the pandemic wanes
After paying a heavy toll to the Covid 19 pandemic, the UK is getting back on its feet. Now that more than 80% of the adult population has been vaccinated, the UK economy was able to reopen for business this summer and to operate almost normally despite the spread of the highly contagious Delta variant. Just as the recovery is running up against supply-side constraints, the government of Boris Johnson is removing fiscal support measures as it proclaims the end of “whatever the cost”. Euphoric so far, the recovery should calm down somewhat by the end of the year.
EcoPerspectives is the quarterly review of advanced economies (member countries of the Organisation for Economic Co-operation and Development) and China.
It provides an outline of several advanced economies using indicators for the past quarter and it looks ahead in order to better understand and anticipate the main economic problems of the countries in question.
For EcoPerspectives, economists from the advanced economies team regularly monitor the key economic indicators of selected countries. In particular, our experts use the quarterly forecasts provided by BNP Paribas (for growth, inflation, exchange rates, interest rates and oil prices). Each economist analyses the economic situation of one or more countries, based on the available indicators, in order to see how they change, including the industrial production index, quarterly gross domestic product (GDP) and inflation forecasts, the consumer price index (CPI) and the producer price index (PPI), and employment and unemployment figures. How various stakeholders’ views evolve is also studied and analysed closely (e.g. household confidence and business climate). The author comments on the main factors that influence and determine the economic activity of the country concerned and the economic outlook for the coming quarter.
