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Economic Overview - July 2021

Although the International Monetary Fund in its July outlook still expects global growth of 6% in 2021, the composition of the growth changed in favour of advanced economies. Vaccine access emerged as the new fault line between advanced and emerging economies as the latter don’t have sufficient access. Consequently, several countries in South and East Asia experienced a surge in new COVID-19 cases, affecting the outlook for emerging markets economic growth. In fact, a new wave of infections are occurring all over the world, reducing the pace at which commodity prices increased.

The first estimate of economic growth in the United States for the second quarter disappointed at 6.5% (annualised) – compared to an expected 8.4% – due to among others rising COVID-19 cases and declining vaccination rates. The Federal Reserve still maintains that sharp rising consumer price inflation (CPI) can be attributed to transitory factors, while full employment is viewed as far from the target. The Fed therefore did not discuss tapering of its bond purchasing programme, meaning interest rate increases are something far in the future.

In the Eurozone and UK daily COVID-19 cases increased at a fast pace. In the European Union (EU) it increased from around 12 000 cases a month ago to almost 70 000 by end July. In the UK labour shortages and surging COVID-19 infections contributed to Services PMI decreasing from 62.4 in June to a four-month low of 57.8 in July, while manufacturing PMI fell from 63.9 in June to 60.4 in July. In contrast, the Eurozone’s Services PMI increased from 58.3 in June to 60.4 in July due to a sharp rise in vaccinations. The European Central Bank (ECB) is not concerned about rising CPI and adopted a symmetric 2% inflation target in the medium-term. However, the Bank of England acknowledged that CPI would probably breach 4% (the CPI target is 2%), but still views the increase as passing.

Japan’s economic growth will be affected by surging coronavirus cases in Southeast Asia (a prominent trading partner region) as it will affect supply chains of Japanese companies. On the inflation front, core CPI increased by a lower than expected 0.2% y/y in June, still driven by higher fuel costs. Japan is also working towards fiscal health as the government is aiming to achieve a primary budget surplus by 2027.

China’s National Bureau of Statistics announced gross domestic product expanded by 7.9% y/y in the second quarter, down from 18.3% in the previous quarter. The People’s Bank of China (PBOC) cut the reserve requirement ratio (RRR) for all banks by 50 basis points, which may release long-term liquidity of around US$155 billion to support the economic recovery, which appear to be losing steam. In this respect manufacturing PMI decreased from 52.0 in May to 51.3 in June as China was adversely affected by increasing COVID-19 cases, shortages of labour and constraints on electricity supply. The Political Bureau of the China Communist Party discussed plans for the second half of 2021, working towards pro-active fiscal policy, keeping the exchange rate stable and steadying commodity prices.

South Africa’s economic growth for the third quarter will be negatively affected by the institution of a stringent adjusted level 4 lockdown (since downgraded to adjusted level 3) and property damaging riots. The government subsequently announced several measures to assist in the ‘rebuilding’ of the affected areas in KwaZulu-Natal and Gauteng, alleviate poverty via the reintroduction of the R350 per month social relief grant and TERS-payments to workers affected by the lockdown. These measures are estimated to cost R38.9 billion, but the National Treasury confirmed this will not increase the fiscal deficit as it will be financed from a “revenue overrun”. Thanks mainly to high commodity prices, first quarter tax collections were about R60 billion more than in 2019 (before Covid-19). The government also reached an agreement with labour unions on salary increases, estimated to cost around R27 billion. The South African Reserve Bank kept the repo rate unchanged and lowered its CPI forecast for 2022.

Multivest Economic Division

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