Macroeconomic focus – July 2021

The ECB concludes its strategy review

The ECB[2] has concluded its strategy review and presented its conclusions. The former inflation target, which was ‘slightly below but close to 2.0%’ has now become ‘symmetric around 2% in the medium term’. The central bank will tolerate slight target overshoots but has not adopted any formal strategy to offset periods of low inflation. The bank also reapproved the tools used in recent years, such as forward guidance, securities purchases and long-term refinancing operations. The monetary pillar of the analysis becomes monetary and financial, with financial stability being taken into account. Finally, homeowners’ housing costs could be included in the index, as opposed to just rental costs, and this should raise inflation slightly.

At the 22 July meeting, ECB chief Christine Lagarde clarified the central bank’s forward guidance, stating: “The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it sees inflation reaching two per cent well ahead of the end of our projection horizon (…) and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at two per cent over the medium term. This may also imply a transitory period in which inflation is moderately above target.” In practical terms, for the ECB to raise rates, the central bank’s forecasts would need to show inflation of 2% over the two final years of the three-year forecast horizon, and the change in prices would also need to be reflected in the core inflation number.

The gradual easing of restrictions is enabling recovery in the worst-affected sectors. In May, retail sales rose by 4.6% after falling 3.9% in April, and the unemployment rate also continued to improve, falling to 7.9%. Unlike in the US, eurozone inflationary pressures remain minimal, with June’s year-on-year price inflation excluding food and energy coming in at +0.9%. Energy-related base effects put headline inflation at 1.9%.

The positive economic momentum should persist, and the PMI[1] indices are still rising. The composite PMI reached 60.6 in July, a level not seen since 2000. The manufacturing and services sectors are doing equally well, although the impact of the Delta variant will need monitoring in terms of potential restrictions. The ECB’s bank lending survey was also good news, showing stable credit conditions along with a clear improvement in demand.



[1]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).

[2]ECB: European Central Bank


Growth facing several hurdles

June’s employment report showed that job creation numbers continued to accelerate with 850,000 new positions created during the month. Although unemployment edged up slightly to 5.9%, the labour underutilisation rate continued to fall to settle at 9.8%. Weekly jobless claims remain on a downward trajectory, despite the seasonal volatility seen in recent weeks and normal at this time of year. Enhanced unemployment benefit payments have been discontinued by 25 US states and are scheduled to end at federal level in early September.

July’s preliminary composite PMI[1] fell from 63.7 to 59.7, with most of the fall related to the services sector. Comments published alongside the data linked this slowdown to low workforce capacity. While job creations have stepped up, businesses’ needs are still not being fully met. In May, job vacancies hit an all-time high of over 9 million and now match the number of job seekers. Against this backdrop, businesses continue to express concern about being able to hire enough staff to meet demand. Furthermore, despite recent hiring being focused on low-skilled jobs, average hourly earnings continue to rise sharply.

Household spending remains buoyant, as evidenced by the strength of retail sales, which remain at the record highs reached following the payments made directly to households by cheque in March. The downside is that new car sales fell by 18% between April and June due to a shortage of electronic components disrupting production. Used car prices have consequently risen sharply and are one of the factors driving inflation higher in recent months. The normalisation of travel-related prices (transport services, hotels) has also pushed up the inflation indices. Irrespective of the food and energy price component, prices rose by a record 0.9% in June and the year-on-year change excluding food and energy has reached its highest level since the early 1990s.

Aside from transportation, growth remains robust in the manufacturing sector. In June, industrial output excluding automobiles rose by 0.8% and capital goods orders are also holding strong. In the residential construction sector, building permits have slowed in recent months following an upsurge. While the sharp rise in prices is dampening buyers’ appetites, the US housing market remains dominated by a supply shortage.

Long-end yields continued to fall despite robust economic data.



[1]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).


Back to normal

Showed year-on-year growth down sharply from 18.3% to 7.9%. The Covid-19 pandemic base effects from the start of 2020 are diminishing and the economy continues to normalise as the authorities gradually reduce support. However, as the latest financial data show, the government’s objective is to avoid triggering too sharp a slowdown.

The Covid-19 pandemic left its mark again in June, notably due to a virus outbreak in the Guangdong province. The outbreak affected the economy and PMI indices, with the Caixin services index falling sharply. Although the monthly data reflected a slowdown, the figures were better than expected. China continues to enjoy an improving foreign trade balance, with both exports and imports rising sharply. Investment expenditure was up 12.6% in June after 15.4% in May.

Retail sales were up 12.1% year-on-year in June after +12.4% the previous month, and industrial output was up 8.3% year-on-year after +8.8% in May.

Inflation remains very moderate, reaching +1.1% overall and +0.9% excluding food and energy. Against this backdrop, the central bank announced its first reduction, by 0.50%, in the reserve requirement rate since early 2020, which should allow for an injection of 1 trillion yuan into the economy. Financing data for the economy were also positive in June. The rate of new financing stabilised at 11.0% and 3.67 trillion yuan entered the economy compared with an expected 2.89 trillion yuan.

More recently, the Chinese government has made several statements and taken measures against large companies, prompting a downturn in Chinese equities.

As of: July 26th 2021


[1]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).


See also:

Source : Lazard Frères Gestion and Bloomberg as of July 26th 2021

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

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