If you consider business cycle as a succession of economic seasons, one can argue that recession is being in a harsh long winter. For that reason, economists call an improvement in economic activity the green shoots of recovery. That’s also the wording that is increasingly being used nowadays to characterize the improvement of economic data. It is an interesting coincidence that it also happens during springtime. So not only do we observe springtime when you look outside the window but we also see springtime in the economy.

That has become abundantly clear when we look at recent data that have been published for the eurozone and its key countries. When we looked for instance at the recent flash PMIs, we were impressed by the strong improvement  that was far bigger than what was expected by the consensus. As a consequence, the manufacturing PMIs are reaching a very high level and sometimes as is the case for Germany,   a historical high level. There’s also been an improvement in services where admittedly the level is still lower than the long-term average. In addition, when we look at national data, we observe a significant improvement in Germany for instance : the ifo data for business climate are showing a very positive picture which is developing clearly within manufacturing but also in other sectors of which services. What you also observe in Germany is that companies are getting really upbeat about the export outlook and that is of course related to the fact that Asia is a very important market for German companies, but also the United States where they are looking with high expectation in reaction to the positive spillover effect that will come from the fiscal stimulus package of 1.9 trillion dollar. When you look at France, there has been an improvement  as well. We can look at the INSEE business climate that has seen an uptick and there’s even been an improvement in terms of consumer confidence.

And then last but not least, we have also seen very recently the publication of the all-important European Commission economic sentiment index. All-important because it is available with a high degree of detail for the European union countries, so it allows a lot of comparisons : how one country is doing compared to the other. The key takeaway from the ESI report is that the situation is clearly improving and this is something that the European Commission staff was very quick to insist upon. As well it’s a broad-based improvement which is really encompassing the different sectors, that is manufacturing, services, construction, retail.

What’s also important is that we have now in the euro area just moved slightly above the longer term average so that’s a big boost for morale. We also observed that consumers are feeling a bit better and, in particular, that the consumer expectations with respect to the unemployment outlook for the next 12 months has improved. That means that consumers are less worried about the unemployment situation over the coming 12 months. This is a development that should support consumer spending.

Several factors explain this upbeat mood that we observe in the business surveys. One is that there is a clear feeling that we are getting closer to the end of the tunnel because the vaccinations continue. Admittedly in European Union countries at too slow a speed but nevertheless, the number of people being vaccinated is increasing day by day. Secondly, there is the view as well that, eventually, this will lead to a reduction in the number of infections and that means that restrictions will be lifted. Then, there is the element that many series, many services are improving. What that implies is that the sheer breadth of the improvement, the fact that so many series show this better picture, is of course  giving a boost of confidence. This is not like a one-off, this is not an exception,  it’s a very broad-based movement. And thirdly, as already mentioned, there is the spillover effect via exports from euro area countries to China or Asia more broadly and also to the United States.

However, there’s one point which is important to keep in mind: we should not forget that the surveys were predominantly conducted  before the restrictions were again tightened in a number of countries towards the end of the month of March. What that implies is that we should be cognizant of the fact that when we look at the April data, there could be some disappointment as there could be a renewed weakening of some of the survey data because in several countries the restrictions have been tightened.

Beyond this probable weakness of survey data for the month of April, how should we label, how should we qualify, the outlook beyond that. Quite simply, we can say you ain’t see nothing yet. Indeed, there will be several factors converging and underpinning a very significant acceleration of GDP growth. GDP will be growing in the next several quarters at a pace which is well above the long-term average and it will be underpinned by a host of elements. One element is that we will be reaching a tipping point:  that is that the media coverage for instance will be predominantly on the vaccinations (a high percentage of people that will have received the vaccine) and will focus less and less on the number of new infections. That means that with the rising number of vaccinations, people will start to go out to shop again and so on… The savings rate has increased during the lockdown  because of the restrictions that have been in place for such a long time. So a higher savings rate means that money will be able to be deployed to finance spending. There’s also the phenomenon of pent up demand :  the fact of not having been able to hop on a plane and travel to some very nice holiday destination or to go to restaurants or to theaters… That’s another factor that will contribute to economic activity and to demand picking up and that will provide a boost.

Let’s not forget the role of fiscal policy support. There is the huge package of  1.9 trillion$ in the US and there’s also the money that will be deployed in the European Union:  the Next Generation EU. The money will start to be deployed in the second half of this year. Several countries have taken a lot of measures in 2020  that will extend into 2021 in terms of budgetary support for the economy.  And finally, very accommodative monetary policy means that access to financing remains fairly easy and at very cheap conditions. And then let’s not forget that the export environment is clearly improving and that is witnessed by the improved assessment of the export order books by European companies. All this means  a better outlook for economic growth clearly in the second half of the year but also that gradually the dominating concern will evolve. It will shift as it has already started to do towards inflation. Is inflation going to pick up somewhat or a bit more than somewhat?  What does that mean for bond yields? Clearly, we have to expect somewhat of an increase in bond yields. Talking about inflation risks and higher bond yields is an element that raises some concern for financial market investors,  but  for everybody else it’s actually very good news. It means that improvement of the economic environment and of the economic outlook is  in the air and we should of course welcome this and applaud it.