Macroeconomic focus – February 2021

A better-than-expected autumn and a tough winter

Fourth quarter 2020 growth numbers came out better than expected. The virus resurgence and implementation of restrictions in various countries had raised fears of another bleak quarter for growth. However, overall Eurozone (1)GDP only fell by 0.7% over the quarter after the 12.4% rebound during the summer. Some countries even saw their GDP grow, such as Germany (+0.3%) and Spain (+0.4%). In France, GDP contracted by 1.3% whereas the consensus expectation had been for a decline of around 4.0%. For those countries that published detailed growth figures, investment expenditure proved robust.

Data from INSEE and the Banque de France give an idea of the impact on domestic growth. In April, GDP was running at 70% of normal levels and the government had forecast this would rise to 85% in November. In fact, by that time growth had reached 92% of normal, thanks to companies pivoting to remote working and to a much greater number of sectors being able to maintain business operations. According to the data, growth at the beginning of 2021 was running 4–5% below normal.

Continued high Covid-19 infection rates in a number of European countries coupled with concerns over the variants have prompted governments to exercise caution, with both the Italian and German governments postponing certain re-openings. While the French government has not announced any new restrictions, it has not eased the existing ones. At the end of February, while some countries such as Spain, where case numbers had risen steeply in January, saw the number of infections slow sharply, the situation was borderline in France and Italy.

The vaccination campaign failed to gain pace during its second month of rollout, and it is more likely to be April before the arrival of significantly larger vaccine deliveries.

In Italy, following the withdrawal of Matteo Renzi’s support, Giuseppe Conte resigned from his government. The outcome was ultimately ‘market positive’, as former (2)ECB chief Mario Draghi became prime minister of a technocratic government that has, for the time being, secured broad support from the various political parties. The prime minister’s first mission will be to implement the European aid plan.

(3)PMI surveys show that the impact of the Covid-19 restrictions continues to be mainly felt in the services sector. In contrast, the manufacturing PMI continues to accelerate and at 57.7 has reached its highest level since the beginning of 2018.

In January, Eurozone inflation excluding food and energy rose sharply to 1.4% compared with 0.2% in December. Postponed sales in France and Italy and an end to Germany’s temporarily lower VAT levels significantly influenced the numbers.


(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)ECB: European Central Bank.

(3)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).


Continued economic recovery

US growth rose 1.0% in the fourth quarter of 2020 following a non-annualised rise of 7.5% in the third quarter, taking GDP to -2.5% compared with its pre-crisis level. All the demand components performed well except for foreign trade and public expenditure, which both weighed on growth. Despite the uncertainties and the impact of the Covid-19 crisis on firms’ balance sheets, business investment is proving resilient and ISM surveys continue to report solid business confidence.

The construction sector is similarly upbeat. While housing starts fell 6.0% from a high point in January, building permits remain strong (+10.4%). Real estate developer confidence has remained upbeat and property prices are still accelerating (+9.5% year on year).

Job creations numbers were disappointing in January at only +49,000 following -227,000 in December. Not only were jobs lost in the leisure and hospitality sectors, but job creations also slowed across the rest of the economy. The household survey was more resilient, enabling a significant drop in the unemployment rate from 6.7% to 6.3%.

Consumer spending fell in December for the second straight month (-0.6% after -0.7%). However, January’s strong rebound in retail sales (+5.3%) shows that the $900 billion recovery plan adopted in December is beginning to take effect amid an improving Covid-19 situation and the reopening of the domestic economy. These data have relaunched the debate on the relevance of a massive new stimulus plan and its inflation risks (+1.4% year on year in January).

Mid-January, the Biden administration presented a $1.9 trillion stimulus plan including direct payments of $1,400 per person, an extra $400 per week in unemployment benefits until September 2021, an increase in tax credits for families, funding for states and schools, and various health measures.

In order to avoid a Senate filibuster by the Chamber’s Republicans, who believe the stimulus package to be excessively large, the Democrats triggered the budget reconciliation process. This allows them to adopt a number of measures with a simple majority instead of the 3/5 majority that would have otherwise been required to negate a filibuster. There are, however, certain limits on the measures that can be passed using the budget reconciliation option, which makes the stimulus plan’s grand total unknown. The key deadline is doubtless March 15, when the current unemployment benefit top-up program ends.


Economic growth losing momentum

China’s fourth quarter 2020 growth beat expectations at 6.5% after reaching 4.9% in the previous quarter (year on year). Full year 2020 GDP grew by 2.3%, a sharp slowdown compared to 2019 (+6.0%), but a good performance compared to other major economies, which experienced abrupt contractions.

Monthly data show that exports and consumption drove China’s fourth quarter 2020 growth. Exports rose from 8.9% in Q3 2020 to 16.9% in Q4 2020 and retail sales volumes bounced from -0.5% in Q3 2020 to +5.2% in Q4 2020. Investment remained robust, rising from 7.2% in Q3 2020 to 8.4% in Q4 2020.

The positive fourth quarter 2020 growth data mask a slowdown in domestic demand during the month of December. Retail sales volumes slowed from 6.1% to 4.6% (year on year) and investment similarly slipped from 9.7% to 5.9%. In contrast, foreign demand remains very strong, with exports up 18.1% year on year.

PMI surveys have been deteriorating for the past two months. In January, the composite Caixin PMI fell from 55.8 to 52.2 and that of the NBS PMI from 55.1 to 52.8, with weakness primarily showing up in the services sector. Credit expansion also slowed, and inflation turned back negative in January. That said, the softer prices could reflect distortions related to the Chinese New Year.

To limit the Covid-19 health risks associated with the festive period’s major population movements, the government announced tighter restrictions. They apply from 28 January to 8 March and travelers moving from one region to another must provide a negative test within seven days prior to departure and quarantine for two weeks upon arrival at their destination. Once there, travelers are also required to be tested every seven days, at their own expense. Alongside these requirements, companies have been urged to put systems in place encouraging workers not to travel.

The economic impact of these measures is unclear. On the one hand, travel restrictions raise fears of a negative impact on services expenditure and especially spending related to travel. On the other hand, the restrictions could mean growth can recover faster after the New Year period if migrant workers do not travel and remain in the workplace at a time when factory closures generally disrupt production and exports.




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Source : Lazard Frères Gestion

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

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