Perspectives

Perspectives

    Perspectives - 07 July 2021
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    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. For the time being, both the Federal Reserve and markets are relaxed about it but we should expect that over the coming months, the market sensitivity to growth and inflation data will be higher than normal in view of what they would imply for the Fed’s policy stance. 
    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. In this persistently tough environment, inflation will continue to hold near 0%, far from the central bank’s 2% target. Monetary policy will remain accommodating and unchanged in 2021 and 2022, even though the Bank of Japan might allow long-term sovereign rates to rise to the upper range of 0.25%.
    The Eurozone economy is bouncing back. From a macroeconomic perspective, the region is closing the gap on the losses accumulated since spring 2020 more quickly than expected just a few months ago. Unless a new wave of the pandemic breaks out due to the spread of Covid-19 variants, Eurozone GDP should return to pre-crisis levels by the end of the year. Accelerated vaccination campaigns and the gradual lifting of health restrictions are reducing uncertainty and boosting the confidence of economic agents. Consumers, who have adapted to restrictive health measures, are playing a key role. Despite these favourable dynamics, public policies are remaining cautious. From a monetary perspective, the European Central Bank recently expressed some optimism concerning the Eurozone’s capacity to rebound, although for the moment it is refusing to begin tightening monetary policy. As to fiscal policy, investors welcomed the European Commission’s first bond issue to finance the Next Generation EU recovery plan.
    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. The manufacturing sector should benefit from the EU’s Next Generation programme. The rapid recovery could rekindle inflationary pressures and the ECB’s monetary stance might become too loose for Germany. 
    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. GDP growth could average 6% in 2021 (an optimistic forecast that is a half point higher than the June 2021 consensus), and will remain strong at an estimated 4.6% in 2022. In our eyes, the economic risks are balanced: the unlocking of forced savings that have accumulated over the past year is an upside risk, while supply-side tensions and pricing pressures are downside risks. Although the Covid-19 pandemic has diminished significantly, the health risk has not completely disappeared given the rapid spread of variants. 
    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. After a record year in 2020, the government deficit could remain at over 8% of GDP this year and remain elevated until 2022 at least. The European Commission’s approval of Spain’s recovery plan will, however, allow Madrid to receive the first round of European subsidies. Thus EUR9 billion in grants could be allocated in July, with a further EUR10 billion unlocked by the end of 2021.    
    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. Creating employment and reducing the unemployment rate remains the country’s major challenge, but Greece should continue to benefit in the short and medium term from favourable financing conditions, notably thanks to the support of the ECB.
    No sooner had the divorce agreement with the European Union been signed than the UK started disputing its terms. On 16 March, the British government was formally notified by the European Union for breaches of the Protocol on Ireland and Northern Ireland and violation of the duty of good faith. The final outcome, which can include sanctions, is yet to be decided. The fact remains that Brexit, described as a “historic mistake” by the remaining 27 members of the EU, appears as nothing more or less than what it is: a clear break. Admittedly, it will not stop the UK economy from recovering. Having managed to avoid tariffs, become a convert to “whatever it takes“ and now being well on the way to winning out over Covid-19, the United Kingdom, like other countries, is enjoying euphoric economic conditions. Yet beyond the short term outlook, the benefits it could get from its decision to go its own way are still to be proved.
    The very accommodative policies implemented by the Federal Council and the Swiss National Bank have been very successful in limiting the economic consequences of the pandemic. In 2020, economic activity contracted by 3%. The latest business cycle indicators point to a strong rebound in the second half of the year. The recovery is broad-based. Private consumption will be one of the main engines of growth, as households will spend part of the savings accumulated during the crisis. The breakdown of the negotiations between the Swiss Confederation and the EU, and the possible introduction of a global minimum corporation tax rate are likely to undermine the country’s competitiveness in the medium term.  
    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.
    Perspectives - 09 April 2021
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    In many countries the number of new Covid-19 cases has begun rising again, forcing governments to maintain or tighten health restrictions. This is the case for the Eurozone, among others, where a true rebound in growth and demand has been postponed yet again. The timing of the recovery will depend essentially on the effectiveness of restrictive measures and the acceleration of vaccination campaigns, but also on spillovers effects with some of its trading partners whose economies are picking up more rapidly. The United States is one such country thanks to its successful vaccination campaign and the enormous recovery plan that has just been launched. America’s influence is not limited to providing greater opportunities for European exporters. The upturn in US bond yields has partially carried over to long-term rates in the Eurozone, pushing them higher. This trend largely reflects higher inflation expectations, although the Federal Reserve is convinced that the surge in inflation will be short-lived. Companies and households should welcome the bond markets’ jitters, which clearly signal the sentiment that the economy really is improving. 
    The US economy has taken off. Bolstered by the easing of the Covid-19 pandemic as much as by unprecedented fiscal support, GDP will soar by at least 6% in 2021, surpassing the pre-crisis level of 2019. Inflation will accelerate and temporarily overshoot the Federal Reserve’s 2% target. Nonetheless, the central bank will not deviate from its accommodating stance. The Fed’s top priority is  employment, which continues to bear the scars of the crisis and has a long way to go before making up for all of the lost ground. As a result, monetary conditions will remain accommodating, both for the economy and the markets, even at the risk of encouraging some excessive behaviour.
    At the end of the annual “Two Sessions”, China’s major political event, Beijing announced its economic targets for 2021 as well as the priorities of its new five-year plan. By setting this year’s real GDP growth target at simply “more than 6%”, which is lower than forecasts, the authorities are signalling that the economic recovery following the Covid-19 crisis is no longer the main focus of concern. In the short term, they will continue to cautiously tighten monetary policy and gradually scale back fiscal support measures. Above all, the authorities have affirmed their medium-term development strategy, which aims to boost innovation and drastically expand China’s technological independence.
    As in other countries the world round, Japan reported a record-breaking recession in 2020 and the lack of consumer confidence, stifling domestic demand, could slow the dynamics of its economic recovery. Japan’s vaccination campaign has been relatively slow, notably compared to the United States, but the country was not hit as hard by the pandemic as other countries. Faced with expectations of sluggish demand, Japanese companies will continue to be reticent about making investment decisions. This outlook could undermine Japan’s already weakened growth potential. Tighter financing conditions would be especially harmful, and the Bank of Japan will remain vigilant in the current environment of rising interest rates.
    The pandemic continues to spread rapidly within the Eurozone member states, and many uncertainties remain. Yet the most recent economic data are encouraging. Far from claiming victory, these signals nonetheless raise expectations of an accelerated economic recovery as of H2 2021. The greatest hope lies in the successful rollout of vaccination campaigns among national populations. The authorities will remain at the bedside of an ailing Eurozone economy, ready to help through public policies while trying to avoid any tightening moves that might hamper the recovery process. In terms of monetary policy, for example, Christine Lagarde announced that the ECB would step up the pace of securities purchases, which means that financing conditions are being closely monitored.
    After a difficult start of the year, business cycle indicators improved markedly in March on the hope that the worst of the Covid-19 crisis is behind us. GDP is projected to reach the pre-Covid-19 level by the end of 2022. Many of the government support measures will remain in place this year. Fiscal policy for 2022 will depend on the outcome of the general election in September. After a significant weakening of the Christian-Democrats in the polls, a coalition between Greens, social-democrats, and liberals cannot be excluded. The business sector has been severely weakened during the crisis, but this is unlikely to have long-term consequences.
    Contrary to what we were led to expect in late 2020, the discovery of vaccines did not end the stop-and-go nature of the recovery. In early 2021, due to the emergence of variants and the slow pace of the vaccination campaign, the exit from the crisis continues to follow a jagged trajectory. The light at the end of the tunnel seemed to be getting closer (Q4 2020 GDP did not decline as sharply as feared; a technical recession was apparently avoided in Q1 2021, with feeble but positive growth) but now it is fading again (the rebound has been pushed back until Q3, with Q2 growth verging on zero, and it could even slip into negative territory). The strong upturn in March confidence surveys is good but fleeting news, because it does not integrate the recent series of tightening of lockdown measures. We should expect a relapse in April before a turnaround in May, which we hope will be sustainable this time, thanks to the acceleration of vaccinations and support from the policy mix. The expected rebound in H2 would lift growth to an average annual rate of 6.1% in 2021, followed by 4.4% in 2022.
    In 2020, real GDP fell by 8.9%, with almost 2.5 million of full-time equivalent jobs lost. The decline in consumption was the main driver of the recession, accounting for three fourths of the economic downturn. Stagnating incomes and the lack of confidence increased households’ propensity to save. The services sector was the most severely affected by the crisis, with value added declining by 8.1%, while manufacturing benefitted from the moderate recovery of exports. The problems raised by the pandemic combined with -and worsened- structural issues that had been slowing down the country’s economic growth up to now. In the years to come it will be hard to implement a solid growth pattern without decisive interventions that would foster innovation and productivity.
    Economic growth remains extremely fragile in early 2021. In addition to the Covid-19 pandemic, Spain was hit by Storm Filomena in early January, which has had a direct negative impact, notably on consumption: both automobile and retail sales plummeted this winter. We now expect GDP growth to be flat in Q1. Even so, the economy could rebound strongly either this spring or more certainly by summer, although we cannot completely rule out the downside risks associated with the UK variant and a possible fourth wave of the coronavirus in Spain. We are forecasting real GDP growth of 5.9% in 2021 and 5.6% in 2022, following a record contraction of 10.8% in 2020.
    Thanks to healthy government finances and a light lockdown strategy, the Netherlands weathered the crisis better than the surrounding countries. Nevertheless, the economy was in a mild recession in Q1 2021. Economic sentiment indicators point to rapid recovery in the second half of the year. Despite the clear victory of the outgoing government at the general election in March, the formation of a new coalition is in turmoil. Doubt has increased whether Mark Rutte can lead his fourth government in succession. The main task of the coalition is to put a recovery programme on the rails.
    The Belgian economy shrunk by 6.3% in 2020. This amounts to the biggest post-war decline on record. A better-than-expected fourth quarter pushed the final numbers up somewhat and will have a positive effect on the yearly growth rate for the whole of 2021, which we see at 3.7%. Consumption suffered during the second lockdown at year’s end and is expected to dip again in April, as the government reinstated shopping on appointment only and instructed schools to extend the Easter holiday break. Unemployment increased significantly but less than was feared and the long-anticipated wave of bankruptcies hasn’t quite materialised so far. Tough choices lie ahead for the multi-party government, which should also focus on reining in its budget deficit in the years to come.
    Portugal was one of the European countries hit hardest by the third wave of the coronavirus pandemic this winter. The government reinstated a “strict” lockdown that drastically reduced the spread of the virus. A very gradual reopening plan was launched on 15 March and will end on 3 May. Hopes for a solid economic recovery hinge on the vaccination campaign currently underway, but like elsewhere in the European Union, it is progressing at a slow pace. The success of the UK vaccination programme nonetheless raises promising prospects for the recovery of Portugal’s tourism sector, which is highly dependent on British tourists. Real GDP could rebound by as much as 5-5.5% in 2021, after contracting by 7.6% in 2020.
    Gambling has risks, but sometimes you win big. No stranger to risky gambles (Brexit, herd immunity to Covid-19…) the UK Prime Minister, Boris Johnson, can now claim that one of his wagers – betting early and big on vaccines – has allowed his country to be amongst the first to see the light at the end of the tunnel. Having been in strict lockdown since the beginning of the year, and whilst also suffering from a collapse in trade with the European Union, the economy now seems to have touched bottom; economic surveys and mobility reports promise better days ahead. Both fiscal and monetary policy will help support the recovery, before thoughts move to addressing the deficit, with the first turn of the screw expected in 2023.
    After a second, particularly long and severe wave of Covid 19 in late 2020, Sweden has been dealing with a third wave of the pandemic since mid-February. Although the vaccination campaign is unfolding satisfactorily, the resurgence of the pandemic risks pushing back the expected profile of the recovery. Monetary and fiscal policy will remain accommodating as long as necessary.
    With relatively few deaths and only a mild decline in GDP in 2020, Denmark has been fairly resilient in the face of the Covid-19 pandemic. To counter a second wave of the virus, more restrictive health measures had to be introduced in early 2021, which will push back the timing of the recovery, albeit without jeopardising it. With its vaccination campaign unfolding smoothly and the extension of fiscal support measures, the country is well positioned to exit the crisis. To better control the krone’s peg to the euro, Denmark’s central bank has made major adjustments to its monetary policy.

On the Same Theme

Uncertainty continues to decline, but for how long? 7/26/2021
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.
International trade: towards peak growth in trade? 7/26/2021
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. 
Economic recovery in the advanced countries: lessons from the past 7/23/2021
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. 
Mobility is still favourable despite the pandemic’s rapid spread 7/19/2021
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.
PMI: Loss of growth momentum 7/12/2021
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 spreads its web over the world 7/12/2021
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 number of new Covid-19 cases begins to rise again worldwide 7/5/2021
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.
The (unwarranted) stagflation narrative of 2021 6/28/2021
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 EU vaccination campaign maintains a rapid pace 6/28/2021
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.
Mobility: rising trend continues as pandemic eases 6/21/2021
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.

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