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Economic growth rates continue to surprise at the upside, but in an unequal way. The outlook for the United States (US) remains strong, the Eurozone and United Kingdom (UK) should start growing at faster rates, but China and Japan’s growth will probably disappoint in the second quarter of 2021. Meanwhile consumer price inflation (CPI) is surging in just about every country. However, analysis point to supply shortages as the main driver of CPI. This means that the higher CPI should to a large degree be of a temporary nature, meaning that interest rate increases in the major regions – and in South Africa – should not occur in 2021. The ‘risk on’ environment assisted share prices in May and contributed to a weaker US$; higher CPI supported the gold price; while bonds continued to provide returns.
In the US quarter on quarter economic growth of 6.4% (annualised) was registered in Q1 2020. Second quarter economic growth is on track to exceed 10% on a year on year basis. Headline CPI jumped to 4.4% in April from 2.6% in March. However, the increase was driven by a small number of high increasing prices (outliers). For instance, prices of used cars were up 21% y/y. Trimmed mean CPI, which removes “short-term” outliers at the top and bottom of the index, shows an increase of only 2.4% from 2.1% in March. Meanwhile US foreign policy shifted in a move that should support future trade. US and EU negotiators are working to resolve the “Trump-trade-tariff-conflict” on steel- and aluminium products, while a main deal was reached to lift US sanctions on Iran’s oil.
Europe's economy registered a technical recession after contracting -0.6% in Q1 2021 following a -0.7% decline in Q4 2020. However, the lifting of lockdown restrictions in some countries and removal of vaccine bottlenecks created an environment for the economy to grow at a faster pace in Q2 2021. The number of daily vaccine doses administered is now higher than in the US on a per capita basis, but the opening of the economy also contributed to CPI surging. However, the European Central Bank views the bulk of the increase in CPI as passing and indicated that tighter monetary policy is still a long way off.
In the UK the composite Purchasing Managers Index (PMI) continued to increase as the economy opened in response to rising vaccinations. Indications are for strong economic growth in Q2 2020 as indicated by, among others, retail sales which were 10.6% higher in April 2021 compared to February 2020. This can be ascribed to consumers starting to spend some of the pent-up savings acquired during months of lockdown. Although the BoE views the current surge in CPI as transitory, the PMI-report noted the services sector ascribing some of their price pressures as emanating from rising staff salaries. Should this become a trend, the possibility of a faster tightening in monetary policy may increase.
In China some economic indicators continue to point to slowing growth, while CPI is increasing. The People’s Bank of China views the higher CPI to be of passing nature and kept the medium-term lending facility unchanged at 2.95%. In terms of economic policy, the government outlawed any mining and trading of Bitcoin, as well as issuance of any crypto-related financial products as part of the effort to maintain financial stability and develop its own digital currency. China also announced a consumption tax on the imports of light cycle oil (to make gasoil), mixed aromatics (to make gasoline) and bitumen (to make asphalt) from 12 June to increase the competitiveness of domestic refiners.
In South Africa, president Ramaphosa introduced mild restrictions in response to the third wave of COVID-19 infections, but this should not detract much from economic growth that may surpass 4% in 2021. The largest constraint to faster growth will be electricity shortages and slow reforms. Nevertheless, increasing world demand, a recovery in consumer finances and higher commodity prices supported growth in the first quarter. At R96 billion the trade surplus for the first quarter was 205% larger compared to a year ago (April’s surplus exceeded R51 billion). Seasonally adjusted (unannualised) retail sales increased by 1.6% in the first quarter of 2021 from the fourth quarter of 2020, while mining and manufacturing production increased by 3.9% and 0,2% respectively. In addition, tax revenues for April 2021 surpassed many expectations, indicating an acceleration in economic growth in Q2 2021.
Relevant charts:
Multivest Economic Division