Macroeconomic focus – April 2021

Signs of recovery

A breakdown of eurozone fourth-quarter 2020 [1]GDP shows that renewed health restrictions primarily hit household consumption (-3.3% quarter on quarter and -7.7% year on year). In contrast, investment expenditure continued to climb (+1.9% quarter on quarter and -7.6% year on year).

In the eurozone, February’s retail sales rebounded 3.0% following falls prompted by renewed restrictions and VAT levels returning to normal in Germany. However, compared with the fourth quarter of 2020, retail fell 4.3%, prompting fears of a further contraction in both consumption and growth for the first quarter of 2021. In France, the Banque de France estimates that GDP will rise slightly in the first quarter and fall 7% in April compared with the pre-crisis level, which is the same order of magnitude as seen in November 2020 during the previous lockdown.

Confidence surveys continued to improve in April, raising hopes that economic activity has bottomed out. Despite renewed restrictions, the eurozone composite [2]PMI rose from 53.2 to 53.7, its highest level since July 2020. The April manufacturing PMI built on its previous reading of 62.5 to reach a new all-time high of 63.3. The services PMI rose from 49.1 to 50.3, entering growth territory for the first time since August 2020. Consumer confidence is improving and now close to its pre-crisis level.

On the vaccination front, clear progress has been made. Better vaccine supply lines meant that by the end of April the daily inoculation rate for the major EU countries was between 0.5% and 0.6%, which is about twice that of March. The conditions for ramping-up vaccination campaigns now appear to be in place and the pandemic seems to be stabilising.

Against this backdrop, several countries are planning to ease their restrictions gradually. Italy is looking to start at the end of April and France is expected to follow suit in May. In Germany, the timeline is less certain.

As expected, the ECB meeting on 22 April was uneventful with nothing new from Christine Lagarde. The bank’s main monetary policy parameters remain unchanged, and the ECB believes that recent developments are consistent with a strong rebound in growth for later this year. However, the ECB also believes that it is still premature to discuss a gradual scaling back of its PEPP purchases. In terms of inflation, the central bank predicts price rises could accelerate due to specific and temporary factors but that underlying pressures should remain moderate. In March, headline inflation rose from +0.9% to +1.3% year on year, while core inflation edged slightly lower from +1.1% to +0.9%.


(1)GDP (Gross Domestic Product): Total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.

(2)PMI: PMI indices are confidence indicators that summarize the results of surveys conducted among company purchasing managers. A value greater than 50 indicates a positive sentiment in the sector concerned (manufacturing or service).


The economy is gathering pace

US employment figures indicate a sharp economic rebound at the end of the first quarter. The unemployment rate retreated 0.2 points to 6.0% as 916,000 new jobs were created in March and the February figure was revised up from 379,000 to 468,000. There are now 144 million people in employment compared with 153 million for February 2020, prior to the Covid-19 crisis. At the current rate, it will take less than a year to make up the shortfall of 10 million jobs and return to pre-Covid employment levels.

Industrial and construction data also rebounded in March. Following February’s cold snap, industrial output bounced 1.4%, housing starts gained 19.4% and building permits rose 2.7%. Confidence surveys have also been upbeat. At 64.7, the [1]ISM manufacturing index reached its highest level since 1983, while the ISM non-manufacturing index reached its all-time high of 63.7. The [2]NAHB housing market index’s latest reading for April remained at a high level of 83.

With weather conditions back to normal, economic reopenings, and the government’s stimulus cheques, consumer spending is accelerating once again. Retail sales jumped 9.8% over the month and 6.8% excluding the most volatile components (vehicles, fuel, building materials, and restaurants). At $619 billion, they are up 17% from their pre-crisis level in February 2020. While spending on services is still below levels prevailing before the crisis, bar and restaurant sales rebounded 13.4% in March to $62 billion, which is 5% less than the beginning of 2020.

Numbers from a recent New York Fed survey indicate that households only spent a quarter of their March stimulus cheque payments, with the remainder either saved or used to repay debt.

The savings come on top of previous direct government transfers and forced savings due to lower spending during lockdowns. While the money accumulated provides households with significant reserves for the months ahead, the speed at which it will be spent is difficult to predict.

Inflation was particularly strong in March following months of weakness. The comparison with exceptionally low prices in 2020 automatically results in higher year-on-year inflation, but the month-on-month rebound was also higher than expected. Core inflation (excluding volatile food and energy components) was up 0.3% for the month to 1.6% year on year, while the equivalent headline numbers were +0.6% and +2.5% respectively.

[1]ISM: The ISM manufacturing index, which reflects the health of the sector in the United States, and the ISM services index, which is more specific to service activities. This index, evaluated as a percentage, is the result of a survey of 400 companies on data such as: indicators on new orders, production, employment, delivery times, prices, inventory, export and import orders, etc.

[2]The National Association of Home Builders (NAHB) Housing Market Index measures the relative level of current and future single-family home sales.

Growth slowdown most likely only temporary

China’s first-quarter 2021 [1]GDP grew by 18.3%, a record since the data series began in 1992. This spectacular but widely expected rise was the result of base effects following the economic shutdown in the first quarter of 2020 that result in very high year-on-year figures.

In contrast, the quarter-on-quarter growth figure, which better captures ongoing economic momentum, is showing a clear slowdown in the first quarter with GDP falling to 2.4% from 13.4% previously. When compared with the pre-covid figure in the fourth quarter of 2019, GDP is still up 6.9%.

While a breakdown showing the various demand components is not available, monthly retail sales and investment figures for the first three months of 2021 suggest that the growth slowdown is primarily due to weaker consumption and reflects the travel restrictions that were implemented over the New Year period to prevent a virus resurgence. Investment expenditure also slowed, but to a lesser extent.

While base effects make March’s economic data difficult to interpret, year-on-year retail sales beat expectations at 34.2%. They also rose month on month, suggesting a rebound in consumption after the lockdown restrictions were eased. However, other year-on-year readings generally undershot expectations: industrial output slowed from 35.1% to 14.1%, investment from 35.0% to 19.4%, and exports from 154.9% to 30.6%.

Although the [2]PMI surveys were mixed, they were broadly reassuring. Following a sharp fall in recent months, the services PMI survey data rebounded strongly, probably due to easing in Covid-19 restrictions. The official PMI rose from 51.4 to 56.3 and the Caixin PMI from 51.5 to 54.3. March’s manufacturing surveys diverged, with the official PMI rising from 50.6 to 51.9 and the Caixin PMI edging lower from 50.9 to 50.6.

Credit data for March compared with a year ago showed a slowdown in new lending from 5.2 to 3.3 trillion yuan. This is no surprise as credit rose sharply in March 2020 in response to the pandemic. At the annual session of parliament in March, the authorities also announced their intention to gradually scale back their support for the economy amid rapid recovery and a sharp rise in debt in 2020.

[1]GDP (Gross Domestic Product): Total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.

[2]PMI: PMI indices are confidence indicators that summarize the results of surveys conducted among company purchasing managers. A value greater than 50 indicates a positive sentiment in the sector concerned (manufacturing or service).



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Source : Lazard Frères Gestion

The opinion expressed above is dated April 26th 2021, and is liable to change.

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