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    18 October 2021
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    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 number of new Covid-19 cases around the world dropped below the symbolic level of 3 million in the week of 7 to 13 October, representing a 7% fall on the previous week. This fall was shared across all regions other than Europe, where case numbers climbed for the third week in a row. This increase has mainly been focused on Eastern Europe, the UK and, more recently, Germany. Meanwhile vaccination campaigns have continued to gain ground.
    11 October 2021
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    Successful market timing between equities and cash requires high skill levels. Very low official interest rates, through their impact on market rates, create a disincentive for doing market timing because they increase the break-even skill level. The same applies for quantitative easing. These considerations are important from a financial stability perspective. Growing investor reluctance to do market timing will probably lead to a decline in equity market volatility and an increase in equity valuations. The former provides a false sense of safety whereas the latter increases the sensitivity to negative news and hence increases the riskiness. 
    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.
    The number of daily new Covid-19 cases reported worldwide continues to decline. Meanwhile, there has been a recent drop in visits to retail and recreation facilities in France, Italy, Belgium, Japan and the UK, but continued increases in Germany, Spain and the USA. It is worth noting that in Belgium such visits are still at their pre-pandemic levels, despite recent falls.
    04 October 2021
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    When the pick-up in inflation during a growth upswing is driven by the demand side, inflation is considered to be good. However, inflation can also be bad. In that case, higher prices do not follow from e.g. higher wages due to a tight labour market. Bad inflation rather reflects supply-side shocks. This is, to some degree, the situation that is unfolding in the Eurozone and other economies due to the recent huge increase of oil and gas prices. Bad inflation weighs on households’ real disposable income and hence spending. The impact is expected to be larger for households at the lower end of the income distribution, considering that a bigger portion of their expenditures goes to fuel and in particular heating, and that they also have a lower savings rate.
    Our Pulse chart shows that the economic situation in Q3, designated by the blue area, was almost unchanged from that in the previous quarter, represented by the area delimited by the dashed lines. Recent business cycle indicators even suggest that the recovery is losing steam. The ifo business indicator has been declining since July. In particular, the manufacturing sector is reporting a worsening of business conditions as both activity and expectations are on a declining trend.
    For the first time in several months, the INSEE and Markit business climate surveys did not move in the same direction in September. The INSEE composite index picked up slightly (up 1 point to 111), while the composite PMI continued to erode (down 1 point to 55). The activity component of the manufacturing PMI declined more sharply (down 3 points to 51.3) than for the services PMI.
    The Covid-19 pandemic continued to ease for the fifth consecutive week, with new cases down by 10.3% between 23 and 29 September, relative to the previous week (chart 1). This represents the biggest fall in case numbers since the end of August 2021. As far as visits to retail and recreation facilities are concerned, we have recently seen weaker numbers in some euro area countries.  
    27 September 2021
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    Monetary desynchronisation between the US and the Eurozone seems unavoidable due to a very different performance in terms of inflation. Whether this will complicate the ECB’s task of reaching its inflation target depends, in the short run, on the impact on financial conditions in the euro area. This influence will probably be small. In the medium run, when the US tightening cycle is well underway, US domestic demand growth will be slowing down, which will weigh on imports and hence Eurozone exports to the US. This would complicate matters for the ECB if by then, inflation has not yet reached its target. 
    Our different uncertainty gauges are complementary, in terms of scope or methodology. Based on the latest readings, some divergence is developing. This probably reflects the role of supply disruption that is causing bottlenecks and, in certain countries, the rapid spreading of the Delta variant. 
    Most indicators confirm that world demand for industrial goods is still going strong, suggesting an accentuation or at least the continuation of the supply-chain problems currently facing many companies. Production pressures are compounded by transport pressures, which were showing no signs of easing in early fall. 
    The global Covid-19 pandemic continued to ease for the fourth consecutive week, with new cases down by 6% between 16 and 22 September, relative to the previous week. This downward trend was observed in all regions. Meanwhile, vaccination campaigns have continued to gain ground.
    20 September 2021
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    Although they have eased recently, high Eurozone manufacturing price pressures are fuelling analysts’ concerns that inflation could stay high for longer. There is an impression that the ECB is increasingly sympathetic for this view. This is important in the run-up to the December meeting of the governing council. Whether supply bottlenecks and rising input prices will have a longer-lasting effect on inflation depends on the transmission to the rest of the economy. One would expect it to be higher under a combination of strong demand, low inventory levels and long supplier delivery times. This corresponds to the current situation in the sectors producing durable consumer goods, intermediate goods and investment goods. Perhaps, inflation could surprise to the upside after all in the near term.
    China’s economic growth slowed sharply over the summer. Lockdown measures reintroduced in response to the resurgence of the Covid-19 pandemic and the threat of the new Delta variant dealt another blow to private consumption. Growth in retail sales volumes dropped to 6.4% year-on-year in July and then to 0.9% in August, from an average of 11.9% in Q2 2021.
    Inflation largely surpassed expectations at 3.2% year-on-year, the highest level since 2012, and well above the Bank of England’s official target of 2%. As a result, BoE Governor Andrew Bailey must officially explain why inflation is above target and whether the situation will last.
    The number of deaths also declined for the third consecutive week, down 3% compared to the previous week. In terms of retail and leisure activity, footfall has returned to pre-pandemic levels in Germany, Belgium, France and Italy, while it is still below pre-Covid levels in Spain, the United States, Japan and the UK.
    13 September 2021
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    The new macroeconomic projections of the ECB staff provide sobering reading for savers hoping that, one day, the policy rate will be raised. It is clear that at the current juncture, certain conditions of the recently updated forward guidance on interest rates states are not met. Based on the latest ECB projections, it seems this would still be the case in 2023, even under the hypothesis of a mild scenario. The slow increase of underlying inflation would probably be considered as unsatisfactory. Savers can only hope that the interaction between growth and inflation will evolve or that the ECB projections turn out to be too cautious.
    After two quarters of slight contraction (-0.4% q/q in Q4 2020, -0.3% in Q1 2021), during which lockdown restrictions were reintroduced in various countries in the zone, growth bounced back strongly in Q2 2021 (up 2.2% q/q, 14.3% y/y). The growth carry-over is nearly 4% and the gap to the pre-crisis GDP level of Q4 2019 is now only 2.5%. The strength of the rebound had already been seen in survey data from April to June, whether from Markit’s PMI or the European Commission’s Economic Sentiment Index (ESI).
    Although the pace of growth in industrial production has slowed, our barometer shows significant improvements in exports and retail sales over the last three months (shown in blue) compared to the previous three months (delimited by the dashed line). The second estimate for Q2 GDP, published on 31 August, confirmed a solid recovery (+2.7% q/q), driven in large part by the easing of restrictions and the subsequent increases in consumption. 
    The Spanish economy has put in a solid performance over the summer, with a marked improvement in the employment data. The number of workers registered with the Social Security system has risen by more than 410,000 over the past three months, and now nearly match the pre-Covid level. The unemployment rate is likely to fall again in Q3 as a result. It already dipped to 14.3% in July, not far from the pre-pandemic low of 13.7%. Given that a significant share of the new hires were seasonal contracts, we will have to wait for this autumn’s employment figures to get a more accurate picture of the strength of the recovery. 
    Global Covid-19 case numbers have started to decline again after a rising trend lasting nearly two months. Some 4.2 million new cases were recorded between 2 and 8 September, a reduction of 6.3% on the previous week. This development was shared between all regions: Africa -25%; South America -16.2%; Asia -7.8%; Europe -2.3%; and North America -2.3%. The total number of deaths also fell over the same period. Meanwhile vaccination campaigns continue to gain ground, with 5.6 billion vaccine doses given by 8 September.
    06 September 2021
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    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. On the occasion of the decision on the PEPP, it might be worth to consider revisiting the link between APP guidance and rate guidance.
    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. 
    In his traditional monetary-policy speech to the annual Jackson Hole Economic Symposium, Federal Reserve Chairman Jerome Powell expressed satisfaction with the latest US jobs market figures. He had good reason to do so: in the three months from June to August, the US economy created more than 2.2 million jobs (non-farm activities), including almost 800.000 in the resurgent tourism industry (hotels, restaurants, leisure etc.). Although the Covid-19 jobs deficit remains large (around 5.5 million) and although the unemployment rate is still too high by American standards (5.2%), the situation is gradually returning to normal.
    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).
    30 August 2021
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    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.  
    The credit impulse in the eurozone, reflecting the year-on-year change in credit outstanding, remained negative in June 2021. As a reminder, the introduction of financial support measures for companies by eurozone governments led to exceptionally strong but temporary growth in bank lending to non-financial corporations in spring 2020. Combined with this, the slowdown in outstandings seen a year later (+1.9% y/y in June 2021 vs. +5.3% in March 2021) squeezed the credit impulse in lending to non-financial corporations (-5.3% in June 2021 vs. +0.3% in March).
    The German economic climate has significantly improved according to our Pulse. The blue area, representing the situation in the past three months, has clearly expanded compared to that in the preceding three-month period (the area within the dashed line). This is most obvious in the hard data for the manufacturing sector such as orders and production, which strengthened significantly in Q2 from the previous quarter.
    According to INSEE’s preliminary estimate, French GDP grew 0.9% q/q in Q2 2021. This outcome was slightly better than expected, as we had forecast a 0.8% rise and INSEE a 0.7% increase. Although growth in France was significantly weaker than across the euro zone at large (2% q/q) or the United States (1.6% q/q), it was still a decent figure given the circumstances. Indeed, despite the third lockdown in April, it lay well inside positive territory. The lockdown’s negative impact on economic activity was even more modest than that of the second lockdown. 
    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). 
    26 July 2021
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    Annual inflation has reached 5.3% in the US in June. Its drivers are still very concentrated but there is concern that they will spread. Anecdotal evidence is accumulating that price pressures faced by companies are increasing. Price pressures as reported in the ISM survey send the same signal. Historically, they have been highly correlated with producer price inflation and consumer price inflation but the transmission depends on factors such as pricing power, competitive position, labour market bottlenecks, etc. The next several months will be crucial for the Federal Reserve and for financial markets, considering the Fed’s conviction that the inflation increase should be temporary. The bond market has bought into this view thus far but, going forward, its sensitivity to upside surprises to inflation should be higher than normal.
    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. 
    Once again, Spain has become an epicentre of the Covid-19 pandemic in Europe after new cases of the Delta variant spiked, especially in Catalonia. The number of new contaminations could rapidly surpass the peaks reached during previous waves of the pandemic. The days and weeks ahead will tell whether the vaccination campaign is paying off – more than 50% of the population is now fully vaccinated (2 doses) – and whether the authorities can limit the reintroduction of health measures that restrict economic activity. 
    19 July 2021
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    The significant decline of Treasury yields from their peak at the end of March is puzzling given the growth forecasts and the recent inflation data. This suggests that investors side with the Fed in thinking that inflation will decline. It also reflects the weakening of data in recent weeks, which implies that markets focus more on the change in the growth rate than on its level. The sensitivity of bond yields to economic data moves in cycles. One should expect that, as seen in the past, a less accommodative US monetary policy would increase this sensitivity because these data will shape expectations of more tightening or not. Before reaching that stage, we should already expect an increased sensitivity in the course of 2022, because it is quite likely that inflation will remain above the FOMC’s target.
    Economic growth reached 7.9% year-on-year (y/y) in Q2 2021 vs. 18.3% in Q1 2021. This apparent slowdown is the result of growth rates gradually returning to normal in all sectors and all demand components; it was largely expected as base effects have become less favourable since last spring. This trend explains the contraction of the blue area compared to the dotted area in our Monthly Economic Pulse.
    With nearly 35,000 new daily cases reported last week, the Covid-19 virus is gaining ground again in the UK.  There is an encouraging sign, however, that proves the effectiveness of the vaccine: the number of severe cases seems to be increasing much less rapidly than during previous waves. 
    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.
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