8 April 2021
Monthly Economic Update
Every month, our economists study the macroeconomic situation. They analyse the events that have had an impact in recent weeks, and discuss possible consequences.
Bigger things than the Suez ship are still firmly stuck in the mud
The Ever Given’s canal mishap is surely a metaphor for the uneven global recovery. In our April Economic Update, we look at the growing divergence between the U.S. and Eurozone recoveries and the outlook for inflation amid rising transportation costs and semiconductor shortages.
Learn more about the uneven global recovery, inflation forecasts, and more in the full version of our Monthly Economic Update.
US: All systems go to the US
It has been an up-and-down start to the year as the stimulus payment and successful vaccine rollout lifted sentiment and spending in January, only for a harsh winter storm and generally cold conditions to impact supply chains and keep people tucked-up inside in February. However, the numbers for March are set to bounce sharply with the latest $1,400 stimulus payment being put to use in an economy that is opening up more fully.
As vaccination numbers rise and hospitalisations fall, individual states will relax rules further. This will create more job opportunities while increasing the range of venues for people to spend money. At the same time, household balance sheets are in a strong position with only around a quarter of the stimulus spent with the rest used to pay down debts and increase savings. This will create a strong platform for growth this year. Given this situation, we have revised our 2021 GDP forecast to 6.9%.
Turning to inflation, we continue to see upside risks. In the near term, we could get close to 4% year-on-year as price levels in a vibrant reopened, supply-constrained economy contrast starkly with those of one in lockdown last year. These “base” effects will gradually ease, but we see additional upside threats from commodity prices and shipping costs, but mainly it is from the labour and the housing markets (the Case Shiller index of house prices has risen by more than 10% over the past year, and some regions in the northeast of the US are over 20% higher). Consequently, while the Fed continues to tell us that it won’t raise interest rates until 2024, we think this is going to be an increasingly tough sell given our outlook for growth, jobs and inflation. We look for two rate hikes in 2023 with the Fed funds target rate up at 2% in 2025.
Eurozone: Flip-flopping towards recovery
The third wave of the pandemic has pushed several countries to tighten lockdown measures again or to extend them, jeopardising a reopening of the economy in April. Without a miraculous acceleration of the vaccination pace, not only will the skiing season and Easter holidays be lost, but a big part of summer tourism will be at risk, too.
While the shipping delays prompted by the temporary blockage of the Suez Canal are not a game-changer, this certainly adds to the supply chain disruptions hurting some eurozone sectors. Fortunately, the large US fiscal stimulus will also have a positive impact on the eurozone economy (around 0.5ppt according to the OECD), but the domestic fiscal impulse is likely to soften over the coming year. Moreover, the German Constitutional Court ordered German President Frank-Walter Steinmeier to stop the ratification of the European Recovery Fund on the back of a complaint that the set-up of the fund conflicts with the German constitution. While we believe that the fund will still go ahead, chances are slim that Karlsruhe court will allow the fund to become permanent.
That said, with the second quarter still negatively impacted by the pandemic and the slow vaccination pace, we have reduced our GDP growth forecast for 2021 from 3.8% to 3.6%, maintaining 3.5% for 2022.
At the same time, with strong international demand for goods and strained supply chains leading to increased prices for commodities, intermediate goods and transport, it doesn’t come as a surprise that selling price expectations in industry jumped in March to the highest level since 2011. But in construction, retail and even in the services sector, selling price expectations have also increased. So pipeline price pressures are becoming more important, especially in manufacturing. At the same time, we believe that supply chains will normalise in the course of the year, once inventories have been replenished. Energy prices are also not expected to rise significantly further from today’s levels, given the important spare capacity. And it still seems too early to expect that a spike in inflation will immediately set in motion a price-wage spiral.
Therefore, the European Central Bank has already stated that it will look through the price increases this year and that the economy still needs support. For the time being, this support is focused on preventing a preliminary steepening of the yield curve. However, as the recovery takes hold, the ECB will reassess financial conditions. We stand by our conviction that some increase in bond yields is likely, with the German 10-year bund yield leaving negative territory within 12 months.
- In the United Kingdom, the vaccine rollout and Covid-19 strategy is, for now at least, still fairly promising. That bodes well for a second-quarter growth bounce, but thereafter we suspect the recovery may be a little more muted than in the US. Price pressures are likely to be less of an issue for the Bank of England, suggesting no tightening before 2023
- In China, the exchange rate reform has shown that USD/CNY can be quite volatile, which is why we are revising our USD/CNY forecasts. In this note, we discuss the progress in liberalisation efforts and the prospects for interest rate reform in 2021
- FX: Recovery trades in the FX market have been slowed by the pincer movement of a delayed European recovery on the one hand and by early Fed tightening expectations on the other. We still think there is scope for EUR/USD to recover later this year, but the window of opportunity is closing
Also in this edition:
1. The greening of monetary policy
Central banks around the globe are currently investigating how to join the fight against climate change. Here's what they're already doing and what they still could and perhaps should do.
2. Covid-19 hits European cohesion
Covid-19 has not only had an unequal impact on public health, it also threatens to spread future economic inequality and put European cohesion at risk. One year after the first lockdown measures were taken, we find that the risk of higher inequality is present in various forms within the European labour market.
3. Container and shipping shortage piles pressure on prices
The container and shipping shortages, a surge in commodities demand, and protectionist measures add to inflationary pressures worldwide as the pandemic recovery unfolds. This is unlikely to unwind before the second half of the year.
4. Brexit: Taking stock after a turbulent start to 2021
Some of the initial trade disruptions from the new UK-EU relationship has undoubtedly cleared since January, though the effect of new paperwork is clearly still rippling through the economy. While there are quick fixes that could help reduce some of the burden on firms, a fractious political relationship makes finding compromise tricky