William De Vijlder

It’s summer time for many people, that means an opportunity to take some time off. It also invites us to reflect upon what the rest of the year will bring us on the economic front. Before going into the details, let’s quickly look back at what we have seen thus far. In a nutshell, we can say: growing optimism underpinned by several factors. The very successful vaccination campaigns in a number of countries, and then the fact that restrictions that had been kept in place during the bulk of the first semester have been instrumental in driving down the number of new infections. In addition, we have seen ongoing monetary policy support and fiscal support that has in the United States even been intensified. The European Union is going to see a stepped-up effort with the deployment of the Next Generation EU money as of the second half of this year. This has led to a significant improvement in confidence levels.

Looking at the business and manufacturing sectors, confidence levels are close to record highs. Within services, there has also been a very important improvement and there again high levels have been reached. This of course has had an influence on households as well. Slowly but surely,  household confidence levels have moved up and that has been underpinned by a more confident assessment of the employment outlook,  ad element which is very important of course for household sentiment and for consumer spending.

These developments within different countries have generated positive international spillover effects and that shows up in a positive assessment of export order books in many countries. All these things have led economists to revise upwards their growth forecast as the first half of the year progressed. We’ve seen that in particular in the US and to a lesser degree in the eurozone when assessing the economic outlook for the second half of the year.

A distinction should be made between the third and the fourth quarters. The third quarter should see very strong growth of GDP in the United States but in particular in the eurozone which should catch up with the economic performance realized thus far by the United States. We should however also see that, gradually in the fourth quarter, growth should slow down. We can call it the normalization of economic growth. Normalization, because the performance in the third quarter is of such an intensity that it is really unsustainable, it is abnormally high. The normalization should come from different factors. One element is that the pent-up demand has been unleashed when the restrictions were lifted. That intensity will actually decrease. Then there are supply bottlenecks in certain sectors : think of construction faced with a high level of demand. It has led to important price increases and that could act as a headwind to growth. More generally, price increases in other sectors as well could weigh on spending. Let me re-insist on the fact that I’m talking about normalization because growth should stay well above potential GDP growth. So all in all we will have a pretty positive economic environment. This of course is very much more than ever conditioned by what is happening on the health situation on the Covid-19 front.

In that respect, the concerns have been mounting, concerns about the slowdown in the pace of vaccinations. I’m thinking in particular in the United States. The significant increase in many countries including in Europe of the number of new infections with the new variant delta may end up acting as a very important headwind for growth to the extent that consumers would adopt a more cautious attitude in traveling, spending and so on.  Companies would actually be more hesitant to recruit people or to make the investments that they were planning to make. Without surprise, all this has led in recent weeks to a significant decline in bond yields in the United States but also elsewhere including in Europe. We have also seen that the stock market performance has become more hesitant.

Let me conclude by listing the key attention points for the remainder of the year. Key attention points for markets, for households, for businesses. Inevitably, unsurprisingly, the key attention point will of course be what happens to Covid-19, what happens to the sanitary situation ? In addition to that, a lot of the focus will be on inflation. Inflation, because in the United States, we have first reached five percent and then we have moved beyond that.  The question becomes ever more burning :  is this high level of inflation really a temporary phenomenon  – which is the message coming from the Federal Reserve – or is it going to be long-lasting?  That means that everybody, we included, are very eager to see the publication of the inflation numbers in the coming months to make that assessment. For now the baseline, the base scenario, is that gradually, inflation should start to decline, but we need to see confirmation in the data that will be published.  So inflation is important and it’s in particular an issue in the United States. Another  important element of attention is going to be what are the central banks going to say? The United States sees a significant improvement in the labour market on the back of sustained strong growth, at some point the Federal Reserve will have to start communicating about scaling back the pace of monthly purchases in the context of quantitative easing, so it will need to start talking about tapering its qe. That’s going to be an important topic in the fall of this year and could have some impact on financial markets obviously. And then turning to the eurozone. While the ECB has been running a very successful Pandemic Emergency Purchase Programme that is supposed to end in March next year, everybody is eager to see what it will have to say on that in the fall of this year: will it prolong the programme? Will it stop it?  Will it mean stopping it but also doing more on the traditional asset purchase programme? So a lot of things to talk about and it means that within our weekly EcoTVWeeks, we will keep you posted on.