After declining 1.9% in 2020, Nigeria’s GDP is unlikely to rebound but mildly in 2021 due to persistent and significant macroeconomic imbalances. Despite the first signs of stabilization, inflation is still very high, and several adjustments to the naira have failed to correct the dysfunctions in the foreign exchange market. Although the rebound in oil prices should help reduce somewhat the squeeze on external liquidity, it will surely take more than that to restore the confidence of investors. Without reforms and with no fiscal manoeuvring room, the economy will continue to be vulnerable to external shocks.
South Africa has been severely hit by the Covid-19 crisis, after already several years of very low economic growth and social and political tensions. Real GDP collapsed by 7% in 2020 and public finances have deteriorated significantly. However, South Africa has also benefitted from a strong improvement in its external accounts. The boom in export receipts has supported the rebound in activity and fiscal revenue over the past year. This better-than-expected macroeconomic performance has reassured investors and facilitated the coverage of the government’s financing needs. However, in the medium term, challenges remain unchanged: large and difficult reforms remain necessary to elevate the country’s growth potential and improve public debt sustainability.
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.
After the catharsis of this spring, which saw the rollout of the Covid-19 vaccine alongside that of the billions provided by the Biden plan, the business climate in the US has calmed somewhat. In June, the Institute for Supply Management (ISM) purchasing managers index was at 60.6 in the manufacturing sector, which though high in absolute terms (the long-term average is around 53) is nevertheless down as compared to previous months, and particularly the record month of March. The same modest correction was seen in services.
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
With GDP growth of nearly 7% this year, the US economy is in the midst of a spectacular but uneven recovery, erasing the losses generated by the pandemic, but also leaving numerous workers behind. Fuelled by rising commodity prices and surging consumption, inflation has reached a peak of 5%, the highest since 2008. Esteeming that this flare up will be short lived, the Federal Reserve (Fed) is being tolerant and will forego a preventative tightening of monetary policy. Its top priority is to see the recovery spread to all sectors of the economy and to restore full employment in the labour market.
Economic growth rebounded very rapidly following the Covid-19 shock, but this rebound has also been characterised by mixed performances between sectors and between demand components. Growth of industrial production and exports accelerated vigorously until early 2021 and is now gradually returning to normal. Meanwhile, the services sector and private consumption were slower to rebound, and their recovery still proved to be fragile in Q2 2021. Consequently, the authorities are likely to be increasingly cautious about tightening economic policy. Even so, they should still give priority to slowing down domestic credit growth and adjusting the fiscal deficits.
The Covid-19 pandemic did not hit the Japanese economy as hard as the other advanced countries. In 2020, GDP growth did not contract as much as in other places. Yet a slow vaccination roll out and the lack of confidence of various economic agents are straining the momentum of Japan’s recovery. After a strong performance in late 2020, the Japanese economy is lagging somewhat compared to the United States and Europe. Consumer confidence – a key ingredient for a robust economic recovery – is still low compared to pre-crisis levels. This atmosphere is dragging down private consumption and the dynamics of the tradeable services sector as well. The services industry is having a hard time swinging back into growth
After a sharp contraction in Q1 2020, the economic climate improved significantly in Q2, as the domestic economy gradually opens up. In 2020, the government was very successful in limiting the impact of the coronavirus crisis for households and businesses. In 2021, the fiscal policy stance will remain very accommodative, and covid-19 support measures could amount to 3% of GDP. As the federal election takes place on 26 September, the budget for 2022 will be determined by the incoming government. Opinion polls point to a coalition between the CDU/CSU and the Greens, which should propel climate change to the top of the agenda. The economy is projected to grow robustly in 2021 and 2022. On the domestic side, the main engine of support is private consumption
Based on May and June business confidence surveys, the French economy has been rebounding more vigorously than expected from the third lockdown. We have raised our Q2 growth forecast, from near zero to near 1% QoQ. In Q3, the mechanistic rebound would bring growth to about 3% QoQ. Growth is expected to ebb thereafter as the catching-up effects dissipate, although it should remain high, bolstered by the fiscal impulse. The downside of the vigorous upsurge in demand is that it is squeezing the supply side, which is less responsive. The ensuing supply chain constraints, higher input prices and hiring difficulties are all sources of friction that must be monitored since they could hamper the recovery
At the beginning of 2021, the economic growth surprised on the upside. In Q1, real GDP rose by 0.1%. Private consumption declined, reflecting the disappointing evolution of income and a still high propensity to save, investment rose by almost 4%. The recovery turned out to be uneven, with industry and construction seeing a quicker rebound, while services continued to suffer. The economic growth is expected to strengthen in the coming months. The acceleration of the vaccination programme and a significant improvement in the health outlook have boosted optimism among consumers and businesses. In order to make the recovery long lasting, Italy has to improve the quality of human capital to balance the decline in productivity also due to an elderly work force.
Just when the lights seemed to be turning green on the health front, the spread of the Delta variant in Spain, as elsewhere in Europe, is a cause of concern. The risks remain currently under control and economic activity should record a significant upturn this summer. The easing of travel restrictions and the introduction of the European health pass since 25 June should allow the Spanish tourist industry to lift itself back up, which would have positive knock-on effects on consumption and employment. Even so, and despite the fact that growth is expected to bounce back strongly, to 6.0% in 2021, the Covid-19 will continue to leave its mark on Spain’s public finances
The Belgian economy grew at an above-potential rate in the first quarter of this year, and looks to be on course to maintain this pace throughout the year. Full year growth is expected to come in at 5.1%. Private sector sentiment is strong and the labour market is emerging from the health crisis virtually unharmed, with the unemployment rate still hovering at around 5%. Public finances, largely responsible for the current strong situation through extensive support measures, need to be improved over the medium-term, as the government aims to capitalise on the recovery to fix other, more structural issues.
Although Finland was one of the European countries hit the least by the Covid-19 pandemic, its economic recovery was nonetheless pushed back by a third wave of contaminations in late winter 2020 and early spring 2021. The economy will rebound in the second half of this year, buoyed by consumption and the upturn in global trade. GDP growth should range between 2.5% and 3% in 2021 and 2022. Very concerned about the solidity of its public finances, the country saw its public debt swell by about 10 points of GDP last year while the deficit rose to 5.4% of GDP.
The Greek economy is proving resilient, with the recovery through to Q1 2021 being faster than in most other Eurozone members. This has been driven primarily by the very significant increase in goods exports. The spread of the Delta variant in Europe represents a threat to the recovery in the tourism sector, which is essential to bolster growth and employment over the coming months. Pending this, the labour market shows continued fragility. The unemployment rate climbed to 16.3% in Q1, whilst the number of inactive workers jumped, partly due to the effect of rising numbers of workers on temporary unemployment
Largely spared by the Covid-19 pandemic, Norway reported one of the mildest recessions in Europe in 2020 (-2.5%). The economy is poised for a vigorous recovery in the second half, driven by the acceleration of global trade and the rebound in household consumption. In the light of these favourable prospects, and concerned about the acceleration in house prices, Norges Bank intends to begin raising its key rate gradually as of September, even though core inflation is low.
The labour market should play a crucial role in the recovery through its impact on household income and spending. There are reasons to be hopeful considering that recent business surveys show a further increase in hiring intentions whereas unemployment expectations of households have dropped below their pre-pandemic level. Household intentions to make major purchases over the next 12 months have already increased and this trend should continue on the back of an improved financial situation and reduced income uncertainty.
An accelerated vaccination campaign reduces uncertainty for economic agents – households and companies – and offers a brighter economic outlook. The Bank of Japan’s Tankan index rose in Q2 2021 in both the manufacturing and non-manufacturing sectors.
The Pulse for Italy continues to improve reflecting both a genuine economic rebound and positive base effects arising from the drop-off in activity in H1 2020. Base effects were especially strong in industrial production and retail sales, which in April were still below the year-end 2019 levels.
The fiscal response to the health crisis has been swift, substantial and multi-pronged. Emergency measures, seeking to cushion the recessive shock and facilitate economic recovery, have been joined by recovery packages that support the ongoing upturn and pave the way for future growth. There are, however, disparities between countries as to the sums involved and the distribution of the measures. On our analysis, Italy has made the biggest effort, with a total running at 71% of GDP. It is followed by Germany, with 47%, Spain, with 31%, and France with 26%. As a percentage of GDP, Germany, France and Italy have made greater use of liquidity measures and guarantees, whilst Spain has focused on fiscal measures
The Covid-19 pandemic has had a significant impact on the Moroccan economy. After an unprecedented 6.3% decline in GDP in 2020, the first signs of a recovery are still fragile, even though vaccination campaigns are progressing in both Morocco and Europe, by far the country’s biggest trading partner. This is mainly due to the sluggishness of the tourism industry. It is thus vital that the authorities continue to provide support this year. Despite the rise in public debt, fiscal consolidation is unlikely to start before 2022. The rating agencies S&P and Fitch have downgraded the country to speculative grade. For the moment, however, macroeconomic stability is not a major source of concern. But tight fiscal manoeuvring room could become problematic in years to come
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
Eurozone member states mobilised massive public resources in response to the Covid-19 emergency, providing support for households as well as companies facing a loss of business. As a result, the public debt ratio rose sharply in 2020 to 98% of GDP. Since there is still a big need for economic support in the first part of the year, the Eurozone debt ratio will probably cross the threshold of 100% of GDP in 2021. The ECB plans to continue purchasing assets as part of its Pandemic Emergency Purchasing Programme (PEPP) at least until March 2022, at a time when the Eurosystem currently holds nearly 30 percentage points of GDP in Eurozone public debt instruments. The first disbursements of the Next Generation EU recovery plan are slated for the second half of 2021
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
The cyclical trough seems to be behind us in the Eurozone at a time when vaccination campaigns in the member states are accelerating. From a macroeconomic perspective, the catching-up dynamic seem to be stronger than expected by many analysts. Yet the general economic improvement masks important sector disparities. The Covid-19 crisis will have stronger and more lasting effects on certain sectors, like hotel and restaurant services. In the months ahead, there is a risk that more companies will go bankrupt, especially in the hardest hit sectors.
