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Economic Overview - June 2021

In June the Federal Reserve estimated economic growth for 2021 at 7.0% (6.5% in March), core PCE inflation at 3.4% (2.4%), and projected the first interest rate increase to occur in 2023 (2024). The Fed, however, also said that interest rate increases will occur once broad full employment is achieved, and wage pressures exert pressure on inflation. Some wage increases are already occurring, but the Fed views most as temporary due to labour supply constraints. Elsewhere, President Biden negotiated an infrastructure agreement worth US$ 579 billion, while total federal investment in infrastructure over five years may amount to nearly US$1 trillion opposed to the initial US$2.3 trillion.

In the Eurozone vaccinations are occurring at a faster rate as almost 50% of the population received at least one dose. This contributed to reduced economic restrictions and consumers allocating more funds towards spending on services. It is believed that households’ will to a larger degree spend their savings accumulated during periods of lockdown, which should assist investment in infrastructure, employment and economic growth. The European Central Bank views rising consumer price inflation (CPI) as transitory as it is mostly driven by a low base and high fuel prices. The ECB, may, however, start talking about reducing the pace of quantitative easing by the end of the year.

The Bank of England (BoE) raised almost all of its economic forecasts for the United Kingdom for 2021. Economic growth was adjusted upward, CPI is expected to peak at above 3.0% (the inflation target is 2%), employment growth was raised, and wage growth is projected higher. However, as in other countries, the BoE views the increase in both GDP and CPI as of a passing nature as it is caused by a low base, and high commodity prices. The BoE projects interest rate increases to start in 2023.

Japan’s economy contracted by 3.9% in the first quarter, less than the contraction of 5.1% of the fourth quarter of 2020. A wave of new infections forced the government to impose economic restrictions in several areas in the second quarter, which would have dented the recovery. The Japanese Cabinet are however more optimistic about the economic outlook as the pace of vaccinations is increasing. Meanwhile, the Bank of Japan kept monetary policy unchanged.

In China an outbreak of COVID-19 in Yantian, the busiest port in China, caused renewed supply disruptions as ships had to pass the harbour, affecting world trade and adding pressure on commodity prices to increase. Input prices had already been increasing as indicated by an increase of 9% in May’s producer price inflation (PPI), the fastest increase since 2008. However, CPI for May was up just 1.3% in May, suggesting no strong pass-through from producer prices to consumer prices, yet!

Several emerging market economies experienced new waves of COVID-19 infections during the second quarter of 2021 which caused renewed lockdowns and depreciating currencies (including the South African rand). This will affect the recovery and economic growth. To counter increasing CPI, several central banks such as in Brazil, Russia, Mexico, Hungary and the Czech Republic increased interest rates.

South Africa’s economic growth for the third quarter is set for some pull-back following the imposition of an ‘initial’ two-week adjusted level 4 restrictions due a steep increase in the number of COVID-19 cases. 5 out of every 100 people tested positive in early May which increased to 28 by the end of June. Meanwhile, economic growth potential received a boost from the announcement that private companies can self-generate power of 100MW (previously 1MW), which should attract investments in the electricity sector. CPI probably peaked at 5.2% in May, while household disposable income is recovering – it increased by 5.4% in the first quarter from 3.8% in the fourth quarter of 2021.

Multivest Economic Division

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