Macroeconomic focus – March 2021

Tighter health restrictions

While some countries such as the United States are reopening their economies, business in the Eurozone remains hampered by health restrictions. Retail sales fell by 5.9% in January alone, mainly due to shop closures in Germany. One-off factors such as Germany’s VAT rate reverting to 19% and France’s postponed winter sales may also have had an impact. While these elements led to a sharp acceleration in core inflation in January, February’s figures show a return to normal (-0.3 points to +1.1% year-on-year), as the distortions begin to recede. The weakness in retail sales comes in sharp contrast with robust industrial output (+0.8% in January), which has almost returned to its pre-crisis level.

Amid a resurgence in the Covid-19 pandemic, several European governments announced tighter health restrictions in March. In Italy, 70% of regions have been classified as red zones since 15 March, which implies the closure of non-essential businesses, bars, restaurants, and schools. In France, following an announcement on 18 March, 30% of the population is living under new restrictions that include the closure of non-essential shops. In Germany, on 22 March the government announced that current restrictions would be extended until 18 April, relegating plans to start easing restrictions on 5 April. This means that each region’s restrictions will depend on local incidence rates. In addition, tighter measures were announced for Easter. While the pace of vaccinations in the major European countries accelerated during the first half of March, it subsequently slowed and lags far behind the UK and the US.

Against this backdrop, the sharp improvement in the (3)PMI surveys in March came as a surprise.

The manufacturing PMI rose 4.5 points to an all-time high of 62.4, the services PMI rose 3.1 points to 48.8, and the composite PMI rose 3.7 points to 52.5. However, the PMI survey may not fully reflect the effect of the restrictions that were announced in March, as it was conducted between 12 and 23 March. As such, the data should be viewed with caution pending the release of final figures on 7 April.

Following its March meeting, the (2)ECB announced a significant increase in the pace at which it will be using the €1,850 billion earmarked for its emergency pandemic asset purchase program in order to avoid any premature tightening of financing conditions. However, no specific figure was mentioned, and the bank denied it was seeking to influence the yield curve. The other monetary policy parameters remain unchanged.

(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

After two disappointing months, January’s US jobs report surprised to the upside. 465,000 jobs were created in the private sector, beating expectations of 200,000. The report was all the more welcome given that poor weather had hampered business in various sectors such as construction. The numbers also showed a marked rebound in the leisure and hospitality sector, as an improvement in the Covid-19 situation led to health restrictions being eased. The overall unemployment rate fell slightly to 6.2%.

January’s Personal Income and Outlays report showed the positive effects of the $900 billion stimulus package that was passed in December 2020. Cheques for $600 that were sent to every household sharply increased disposable income (+10.0% January) as well as household spending (+2.0% for January in volume terms). As roughly 80% of these income transfers were redirected to savings, the savings rate also rose from 13.4% to 20.5% of disposable income.

Poor weather in February adversely affected retail sales (-3.0% for the month) along with some other monthly statistics, especially those relating to construction and industrial output. The improvement in weather conditions along with the new $1.9 trillion stimulus package (roughly 9% of (1)GDP) should make way for a strong recovery, particularly in consumer spending.

Dubbed the ‘American Rescue Plan’, this stimulus package includes direct income transfers of $1,400 per person, an increase in weekly unemployment benefits of $300 until September 2021, a rise in childcare tax credits, aid to states and schools, and measures to bolster the fight against the pandemic. The budget deficit for 2021 is expected to reach around -16% of GDP, the same magnitude as in 2020.

The Federal Open Market Committee (FOMC) meeting passed uneventfully, and the Fed’s policy rate will remain in the 0–0.25% range. Fed Chair Jerome Powell indicated that this would be the case until the economy reaches full employment and inflation persistently exceeds 2%. Despite brighter economic forecasts, the committee members’ median policy rate forecast continues unchanged at its current level until the end of 2023.

Jerome Powell believes that it is still too early to discuss any reduction in asset purchases, which are to remain at a monthly rate of $120 billion. Mr. Powell also spoke of putting this year’s inflation changes (+1.7% year-on-year in February) into perspective as he expects them to be temporary. Year-on-year comparisons with last year’s exceptionally low prices will automatically translate into very high inflation figures for March and April 2021.


(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.

Economic growth losing momentum

March saw China’s annual parliamentary gathering take place at its regular date after being cancelled last year due to Covid-19. The annual meeting is a highlight in China’s economic life and the moment when the government sets its priorities for the twelve months ahead. The session also saw China approve its next five-year plan, which lays out economic and social goals for 2021–25.

The government announced that it was aiming for GDP growth of ‘over 6%,’ a very conservative figure given the consensus forecast of over 8%. This flexibility should enable the authorities to control financial risk and avoid having to tighten economic policy too sharply, with growth and employment both remaining priorities.

The budget deficit is expected to decline from 3.7% to 3.2% of GDP. Monetary policy should remain ‘prudent, appropriate and flexible’ in a bid to achieve the right balance between supporting growth and reducing financial risks. The goal is to stabilise non-financial sector debt at 295% of GDP (+24 points of GDP in 2020) by bringing credit growth back in line with nominal growth. As far as the exchange rate is concerned, statements refer to a relatively stable currency at a level consistent with the fundamental variables.

The next five-year plan omits any specific growth targets. It includes, amongst other things, structural reforms (strengthening social safety nets, relaxing the ‘(1)hukou’ household registration system, developing private-public partnerships, opening up the economy, etc.) and makes innovation an absolute priority, in order to secure technological independence and curtail the risk of supply chain disruptions.

China’s economic data for the first two months of 2021 show three key indicators improving significantly: year-on-year, industrial output rose 35.1%, retail sales were up 33.8%, and investment grew 35.0%. Foreign trade data also grew well with exports particularly robust, rising by 60.6%.

The rebound is partly automatic due to the fact that activity was almost at a standstill this time last year.  However, seasonally adjusted data show that industrial output and investment for January and February seem to be improving at healthy growth rates of 4.1% and 15.1% respectively (annualised). In contrast, retail sales appear to have slowed (-2.5% annualised) due to the travel restrictions that were imposed during Chinese New Year.

(1)Hukou is a system of household registration used in mainland China




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Source : Lazard Frères Gestion

The opinion expressed above is dated March 24th 2021, and is liable to change.

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