The German economy further recovered in the third quarter, as GDP strengthened by 1.8% from the preceding quarter. Growth is mainly driven by higher consumer spending related to improved labour market conditions and a further relaxation of sanitary measures. However, our Pulse chart indicates that this favourable environment is unlikely to last: the situation in the three months to October (blue area) worsened compared to the situation in the preceding three-month period (area within the broken line).
The initial estimate of French growth in Q3 2021 surprised on the upside, with a rebound in GDP of 3% q/q, well ahead of our forecast (2.2%) as well as those of Banque de France (2.3%) and INSEE (2.7%). Furthermore, Q2 growth has been revised upwards by 0.2 points to 1.3%. One quarter ahead of schedule, France’s GDP is therefore almost back to its pre-crisis level of Q4 2019. Besides, the growth carry-over reaches 6.6%. Hence, on average over 2021, growth will be much stronger than expected (government forecast of 6.25% and our forecast of 6.3%).
The European Commission has relaunched a comprehensive review of the economic governance framework of the European Union. This initiative is necessary considering the impact of the Covid-19 pandemic on public finances as well as the investment needs in the context of the green and digital transformation. The review process comes with several challenges: an agenda which is particularly broad, the inclusive nature of the debate, involving many stakeholders and, as far as fiscal governance is concerned, the necessity for EU member states to strike a balance between committing to policy discipline whilst keeping national fiscal policy leeway
Chinese real GDP growth slowed to 4.9% year-on-year (y/y) in Q3 2021 from 7.9% in Q2 2021. In the services sector, growth slowed sharply in August (+4.8% y/y), due notably to the reintroduction of lockdown measures to counter a new surge in Covid-19 cases. Although services growth rebounded in September (+5.2%), it is still sluggish. Tighter regulations in a number of segments, including online services, tutoring and video gaming, have constrained activity. The services sector has also been hit by the downturn in the real estate market due to a severe tightening of prudential regulations and credit conditions in the sector. In Q3 2021, house sales contracted while property developers have encountered increasing financing and cash-flow problems
Did the UK government lower its guard too quickly? Since early July, it has lifted nearly all of the sanitary barriers to counter the Covid-19 pandemic. London no longer requires masks to be worn in public spaces, even indoors, nor the presentation of a “health pass”. These measures are left to the discretion of each individual. As a result, the “freest country in Europe”, according to UK minister David Frost, is also the one that reported the highest number of new cases in fall 2021: nearly 45,000 new cases a day. This is ten times more than in France, while the two countries have comparable populations and vaccination rates (67% altogether).
Although the significant increase in inflation in most advanced economies is expected to be transitory, it is necessary to focus on the potential consequences of inflation staying temporarily high for longer. Companies that hitherto have been reluctant to raise prices might do so after all, higher inflation could weigh on spending but also cause wage demands to grow, inflation expectations could drift higher, the market sensitivity to growth and inflation surprises would increase and there could be fears about a change in the reaction function of the central bank. In the coming months, investors and central banks will scrutinise data in parallel, but the former will react more quickly should inflation stay high.
Despite more than 80% of the adult Italian population having received a full vaccination schedule, the government has decided to introduce new constraints to keep the Covid-19 epidemic under control. At the economic level, the impact of this decision is likely to be felt most in the labour market, accentuating labour shortages, and particularly in the transport sector, where between 25% and 30% of workers still do not have the health pass, according to estimates from Confreta, the union for the industry.
The sections of our Pulse on industrial production and retail sales deteriorated significantly. This mainly reflects base effects linked to the catch-up in activity in the first half of 2021. In the coming months, household spending could be held back by the rise in energy prices, which shows no sign of slowing down, and possibly also by lengthening delivery times for certain products.
In the past few months, activity was hampered by the state of emergency in large parts of the country, which affected in particular the services sector. In addition, the manufacturing sector was confronted with supply disruptions, specifically in the car industry. Finally, the substantial base effects related to the pandemic make it difficult to interpret the year-on-year data.
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
India’s economic and financial situation has consolidated slightly since the summer. After contracting sharply in Q2 following the spread of the Covid-19 pandemic, economic activity rebounded strongly in Q3. Even so, at end-September, only 20% of the population was fully vaccinated, which means the country is not sheltered from a third wave of the pandemic. Growth prospects are still looking good for the rest of the year. Household consumption will benefit from falling inflation and higher government spending. Business leaders are still confident, even though they are taking a cautious approach to investment plans. Borrowing rates are low, and the banking sector, though still fragile, is doing better than it was three years ago
Although the political situation has stabilised somewhat following the appointment of a new prime minister, the economic environment has deteriorated. The spread of the Covid-19 pandemic in April forced the government to reintroduce lockdown measures that led to an economic contraction in Q2 2021. The situation is unlikely to improve before Q4, once health restrictions are lifted thanks to an accelerated vaccination campaign. In an attempt to boost growth, the government launched a series of economic support plans, even though fiscal revenue fell short of the full-year target in the first seven months of the year. Consequently, according to the Ministry of Finances, the fiscal deficit is expected to swell to between 6
The third wave of the Covid-19 pandemic is unlikely to jeopardise the dynamic momentum of South Korea’s economic recovery. Solid fundamentals, diversified exports and massive fiscal and monetary support should help limit the impact of the crisis on the country’s medium and long term growth prospects. In contrast, an ageing population continues to erode the country’s growth potential and public finances, even though the government has implemented a series of structural reforms. Household debt has picked up rapidly over the past 18 months. The associated credit risks are limited, however, thanks to the implementation of macroprudential measures and the comfortable level of household financial assets.
The world composite PMI hardly changed in September, despite a rather significant decline in the Eurozone, driven by Germany, Italy and Spain ; Japan and Russia edged higher. The world manufacturing PMI was unchanged in September. Supply chain disruptions and supply bottlenecks continue to weigh on activity levels.
According to our Pulse, the economic situation in the euro zone remains good (the blue area exceeds the grey hendecagon indicating the long-term average of the various indicators) and is relatively stable relative to the previous three months (the blue area is close to that delimited by the dotted line), with the notable exception of retail sales.
One of the shocking paradoxes of America, cradle of the miracle of vaccines against Covid-19, is that the country is still seeing daily death numbers in the thousands. The still-too-deadly wave of the epidemic over the summer may have contributed to the slowing of the recovery in employment.
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
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.
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.
