In the early phase of QE, financial markets perceive central bank forward guidance on asset purchases and on policy rates to be closely linked. This generates a mutual reinforcement of both instruments. At a later stage, there may be mounting concern that the signalling works in the other direction as well. Scaling back asset purchases could be interpreted as a signal that a rate hike will follow soon once the net purchases have ended. In the US, Jerome Powell has been very clear that tapering would not signal a change in the outlook for the federal funds rate. In the Eurozone, both types of guidance are explicitly linked. This may complicate the scaling back of asset purchases in view of the impact on rate expectations
The global manufacturing PMI has eased further in August and is now about two points below the peak reached in June. The levels remain very high in the developed economies but the latest country dynamics show considerable divergence with the index moving higher in Canada, Greece, Hong Kong and Indonesia. It jumped in South-Africa after a plunge in July. In most countries, the PMI is stabilising of trending lower, like is the case in the US and the Eurozone. In China, it has moved below 50. Vietnam saw another big drop.
After rising for almost two months, Covid-19 infections are stabilising globally but remain high. In the week of 25-31 August, 4.6 million new cases were reported (chart 1), similar to the previous week’s figure. However, the trend varies between the world’s regions, with cases rising in North America (+4.6%) and falling in South America (-15.2%) and in Africa (-6.4%), while the situation is stabilising in Europe (due to declines in France and Spain – see chart 4) and in Asia. The vaccine rollout is continuing to accelerate around the world. According to Johns Hopkins University, more than 5.4 billion vaccine doses have been given worldwide (chart 2).
Judging by recent survey data, it seems many advanced economies are hitting against their speed limit in terms of economic growth. This has several consequences. It creates upside risks to inflation, something which is acknowledged by the Federal Reserve and the ECB. Labour shortages can cause faster wage growth but they should also underpin consumer confidence and spending. Supply bottlenecks should boost company investments. However, when growth is at the speed limit, future economic volatility may increase. Finally, it also creates an analytical challenge in understanding whether softer business surveys are demand or supply driven.
According to the latest figures published by Johns Hopkins University, 4.6 million new Covid-19 cases were recorded worldwide between 19 and 25 August, up 1.2% on the previous week. Cases increased in both North America (10.8%) and Europe (3.5%). Conversely, decreases were logged in South America (7.7%), Asia (4.0%) and Africa (1.9%) over the same period (chart 1). In addition, vaccination drives have continued to make progress around the world, especially in the European Union where the pace of vaccination remains very high (chart 2).
Our different uncertainty gauges are complementary, in terms of scope or methodology, yet, based on the latest readings, all but one show an ongoing decline in uncertainty. It reflects the combination of the vaccination campaigns, the lifting of restrictions and good economic data.
Although the momentum remains strong, world trade volumes could begin to taper off this summer, judging by the results of recent opinion surveys. The global PMI index declined 2 points to 56.6 in June, pulled down by the drop in the manufacturing “new export orders” component.
The Covid-19 crisis has deeply affected our economies. Although the rebound observed in recent months seems to have been confirmed, uncertainty persists over their capacity to fully recover. This article will look at how the G7 economies reacted during post-recession phases in the past, in terms of GDP, private consumption and investment. How quickly did GDP in these economies catch up with pre-crisis levels and trends? What were the most dynamic components of aggregated demand during recovery phases? Given the specific characteristics of the Covid-19 crisis, can it really be compared with previous shocks? These are some of the questions that we will discuss in this article while highlighting current sector disparities.
The number of new Covid-19 cases continues to rise worldwide. The surge is due to the Delta variant, which is much more contagious than the other variants. It has now spread to more than 110 countries. The number of daily cases passed the half million mark on July 13 and 14.
The global manufacturing PMI has eased slightly in June but this is masking diverging dynamics. The index was stable in the US, there was a small improvement in the euro area, the UK, Japan and China were weaker. India dropped below 50 and the decline in Vietnam was even bigger. In a nutshell, the levels remain very high in the developed economies but there is a loss of momentum. In the emerging countries, the picture remains very diverse, both in terms of level and change versus May.
The Delta variant is on its way to becoming the dominant strain of Covid-19 and has now been found in some 105 countries. Despite the health situation, visits to retail and leisure facilities remained strong, returning to their summer 2020 levels and marking a return to something close to normal in all advanced economies.
The first half of the year has seen a broad-based improvement in business and consumer sentiment in advanced economies but elevated levels of business surveys reduce the likelihood of further significant increases. The third quarter is expected to see the peak in quarter-over-quarter GDP growth this year. Nevertheless, over the remainder of the forecast horizon – which runs until the end of next year – quarterly growth is expected to stay above potential. This favourable outlook for the real economy brings challenges for financial markets. Surprising to the upside in terms of earnings will become more difficult. Moreover, there is the question of the inflation outlook
After trending downwards for 7 weeks, the figures for the Covid-19 pandemic have begun to rise again worldwide. In recent weeks, the OECD Weekly Tracker of annual GDP growth has been trending lower in most countries.
Strong US and Eurozone GDP growth in the second and third quarters should be followed by a gradual slowdown. Due to the ‘acquis de croissance’ going into the fourth quarter, the perceived slowdown versus the third quarter could be much bigger than what shows up in the current forecasts. In the US, the current elevated inflation will take time to decline. In conjunction with slowing growth, this could boost the stagflation narrative. Such a depiction of the economic environment seems unwarranted however, considering that inflation should decline further in the first half of next year and that the US economy should continue to grow above potential.
The Covid-19 pandemic continued to slow worldwide for the seventh consecutive week, with the number of new cases down 5% in the week of 15-22 June compared to the previous week. This has been the lowest number of new cases since February 2021. The downward trend can be seen in all regions with the exception of Africa.
Between 8 and 14 June, the number of new Covid-19 cases worldwide continued to decline, dropping 9% from 2.9 million to 2.64 million. This marked the sixth consecutive week of falls. On the vaccination front, more than 1.6 billion people around the world have now received at least one dose of a Covid-19 vaccine, or 21% of the global population.
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.
The global manufacturing hardly moved in May, which shouldn’t come as a surprise, given its already high level. There was little change in the new export orders at the global level.
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.
