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Economic Overview - August 2021

Despite a surge in COVID-19 (Delta variant) infections which negatively impacts the performance of the US economy, monetary tightening in the form of bond purchase tapering may happen by December 2021. In his Jackson Hole speech Federal Reserve Chair Jerome Powell echoed the majority view of the FOMC (July minutes) that “if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year.” Powell is optimistic about the outlook for inflation (that it is transitory and will continue to decline) and labor market recovery (a broad-based revival), and is of the opinion that the negative impact of the Delta variant will not materially affect the baseline views of the FOMC. This means the FOMC expected the 1.1% month on month decline in retail sales, driven by a 3.9% drop in car sales and 3.1% drop in online sales, as well as Q2 2021 economic growth of 6.5% (annualised). Going forward, lots of changes must happen for the FOMC to change their views on tapering, inflation and employment.

In China, rising COVID-19 infections, new restrictions on mobility, supply chain bottlenecks, natural disasters (flooding around Henan Province), and decelerating global demand for Chinese exports contributed to slowing economic activity in July. Retail sales and industrial production continue to grow, but at a slowing pace. Retail sales were up 8.5% in July year on year, slower than the 12.1% posted in June. Industrial production increased 6.4% in July year on year, less than the 8.3% of June. Meanwhile, the authorities introduced a significant policy change to promote income equality. The Communist Party vowed to limit the growing power of China’s affluent by regulating their income and factors giving them an advantage. Steps already introduced include limiting the power of technology companies and of private educational companies (seen as providing an unfair advantage to children of the affluent).

Europe’s economic grew by 8.2% (annualised) in Q2 2021, while consumer price inflation seems to be receding as it declined month on month in June. However, the economy of Germany, the powerhouse of Europe, grew slower at 6.1%, while inflation was higher at 3.1% compared to Europe’s 2.2%. Germany’s Bundesbank warned German inflation could soon hit 5%. However, the high inflation should abate as it can be explained by special circumstances such as the reversal of last year’s reduction in VAT, imposition of a new carbon tax, and shortages of key manufacturing inputs. In other countries such as Spain and Italy the economy is growing faster due to easing economic restrictions. In the UK the economy grew by 20.6% (annualised) in Q2 2020, driven by an annualised surge of 32.6% in consumer spending, likely the result of easing economic restrictions. Consumer price inflation declined sharply to 2% in July on technical factors, but the Bank of England (BoE) expects it to rise to 4%. The BoE, however, deems the rise as temporary and said it will likely tighten monetary policy gradually over the next three years.

In South Africa, Stats SA’s rebasing (moving the base year to 2015 from 2010) and re-benchmarking exercise (availability of more sources to more accurately reflect economic activity) meant that the economy was R569 billion (11%) larger in current prices in 2020 and almost 10% larger over the past six years. In real terms, Gross Domestic Product has been restated by 45%. One consequence of the exercise is that the economic contraction of -7% in 2020 was adjusted downward to -6.4%, while changes to the base means that the economy might grow by 4.5% this year – even after accounting for the negative impact of the looting in July. A larger economy, however, aggravated the weak level of inclusivity in the economy as it means a larger GDP could not create more jobs. Indeed, the unemployment rate increased to 44% in Q2 2021, a situation that is untenable and which will cause financial instability if drastic economic reforms are not implemented soon. However, the larger GDP and lower unit labour cost numbers explain the current muted increases in core inflation - and going forward, there is no reason to increase interest rates soon!

Courtesy: Multivest Economic Division

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