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The global economy is recovering

By Hans Bevers - Chief Economist
The Covid-19 crisis is not over. More than ten thousand people worldwide are still dying every day from the virus according to official figures, which are underestimates. The total now stands at over three and a half million. There is still some uncertainty about the possible impact of different variants of the virus. And yet, with the progress made in vaccination campaigns, the global economy is booming. The recovery is not uniform but the global economy is expected to grow by 6% this year. This recovery is also expected to continue next year with growth of around 4% forecast. The nature of the crisis, combined with the savings accumulated and a policy focused on the full recovery of the labour market, point to excellent economic performance after the annus horribilis 2020. The US is leading the way, but the European economy has also moved up a gear. The recovery is lagging somewhat further behind in the developing countries. China, the first country to emerge from the pandemic, is an exception to the rule, but its economic growth is now expected to slow down. In the following paragraphs, we briefly examine economic developments in the main regions of the world.

United States of America: Bidenomics and higher inflation on the horizon

The US economy is already in full recovery. Economic activity grew by 1.6% in the first quarter, thanks in particular to a strong increase in consumer spending (+2.6%). With expected growth of 2% in the second quarter, the US GDP is back above its 2019 level. The US is on track for growth of around 6.5% this year and 4% next year. Inflation is already starting to turn around. This increase is largely the result of the recovery of commodity and energy prices, which had collapsed at the beginning of the pandemic: a “base effect”, economists would say. This is compounded by inventory depletion and the disruption of supply chains. The consensus is that this inflation peak will be largely temporary. We agree with this logic, but still believe that underlying inflationary pressure will increase in both the short term (as shown in the chart below) and the long term. President Joe Biden's planned USD 4 trillion in infrastructure and social spending (offset by increased tax revenues) is just one reason. However, the US Federal Reserve will not suddenly tighten its monetary policy. Before it does so, it will need to see a broad and inclusive recovery of the labour market.

Europe: vaccinations and economic recovery

Now that the vaccination campaigns in Europe are finally moving at a good pace and restrictions are being eased, the economic recovery of the eurozone can really begin. The “double-dip” recession of the autumn and winter will give way to solid growth in the coming quarters. Here, too, household consumption will be the engine of growth. Since the start of the pandemic, households in the eurozone have accumulated around EUR 500 billion in additional savings. As in the US, albeit to a lesser extent, base effects will push inflation significantly higher in the coming months. But this effect is only temporary and is absolutely no reason for the ECB to tighten its monetary policy. Core inflation is likely to remain below target for a long time to come. In addition, the ECB will soon replace its current inflation target of “below, but close to, 2%” with a more symmetrical target. ECB policy will remain flexible for a long time to come. In concrete terms, this means that the Frankfurt-based institution will probably continue its bond purchases until the spring of next year. Rates are not expected to rise over the next few years. It will take time for the labour market to fully recover.

China: slowing credit growth, and CCP anniversary

The country’s resolute management of the coronavirus has led to a dramatic economic recovery in the last year. Policymakers in Beijing have recently focused on curbing credit growth, which should be more in line with nominal economic growth. Credit growth has outpaced economic growth by an average of 4 percentage points over the past 15 years. The logical consequence of this is that economic growth will slow down. The latest five-year plan, presented in March, contains ambitious proposals to make China an innovation leader. The country also wants to reduce its dependence on foreign technologies and thus become more self-sufficient. This policy could well lead to new tensions with the United States. Rapid productivity growth is essential for China, especially given the country’s ageing population. It’s time to celebrate. After the ceremonies in 1981, 1991, 2001 and 2011, the Chinese Communist Party (CCP) will hold a general congress on 1 July to celebrate its 100th anniversary. In 2011, for example, Hu Jintao, the Party General Secretary at the time, gave a speech on the triumphs of the Party since 1921. In his speech, he reiterated the goal of making China a “moderately prosperous society” by 2021, and a “modern socialist country” by 2049 (the 100th anniversary of the People's Republic of China). Even more important than the centenary, the “turnover” of political leaders will begin in 2022 at the local level and will then culminate in the 20th National Party Congress.
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