13 July 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.

Taking stock at half-time

Euro 2020 has provided a welcome distraction and, for some, an opportunity to celebrate after a long and difficult year. But the crowded stadiums are also a reminder of the dangers ahead. The Delta variant is spreading fast and the race to vaccinate has never been more urgent. In this update, we take stock of where we are at 'half-time' and review our forecasts for 2021.

Full analysis

Learn more about the global recovery, inflation forecasts, and more in the full version of our Monthly Economic Update.

US: Feeling the squeeze

Evidence is mounting that while demand is booming, the pandemic has led to damaging scarring of the economy. Supply bottlenecks will be slow to ease, which will negatively impact economic activity and prompt more inflation. The result is we now expect the Federal Reserve to raise interest rates in 2022.

Eurozone: Vaccination vs Delta

The holiday season is likely to spread the Delta variant more widely across the eurozone, though a rapidly advancing vaccination campaign will limit the fallout. With consumers eager to open their wallets, companies can more easily pass on higher input prices. The European Central Bank remains dovish, but the PEPP programme is unlikely to be extended.

Other countries/markets

UK: Covid presses pause on the economic recovery.

Activity data has pulled back from recent highs amid rocketing Covid-19 cases. Thankfully hospitalisations and mortality have been much lower than past waves, and that means rules are set to be eased in coming days. The medium-term story still looks fairly solid despite some slower growth this summer. We expect a 1Q23 Bank of England rate hike.

China: Centenary speech spells a long tech war ahead.

The message from Xi Jinping's speech marking the 100th anniversary of the Chinese Communist Party is clear - he wants China to be a force to be reckoned with, and we think this paves the way for a long and arduous tech war.

Commodities: Losing momentum

Parts of the commodities complex appear to be running out of steam, with downward corrections seen in metals and agriculture over June. However, energy remains well supported, and the short-term outlook will largely depend on OPEC+ policy.

FX: Compressed Fed exit sequence prompts dollar forecast upgrade.

Having been dollar bears since April 2020, this month we feel compelled to raise our forecast dollar profile on what appears to be the start of a more conventional tightening cycle from the Federal Reserve. We are cutting our year-end 2021 EUR/USD forecast to 1.23 from 1.28. And we now expect EUR/USD to end 2022 at 1.15.

Rated: Not bothered

Despite the upbeat macro data, market rates have lurched lower. The eurozone 10yr swap rate remains above zero, but only just. The US 10yr swap rate is now closer to 1% than to 2%. This rates market is not for budging on macro prints it seems. As taper chat intensifies, this should change, and we target 2%. If not, extrapolate and 1% just gets closer.

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