1.1 The global economy on the path to recovery
At the global level, the recovery momentum remains solid, yet characterised by uneven and multi-speed paths across regions. At the same time, growth momentum slowed somewhat, as suggested by high frequency and PMI data, as activity expansion continued but decelerated in several key economies at the start of Q3.
While the global economic consensus stabilised at high level, global economic surprises gradually declined and are now only slightly positive. Pandemic developments continue to be a source of uncertainty and may lead to an increasingly uneven growth path across countries, with a tug of war between vaccination campaigns and virus resurgence. Currently it seems that in the countries with higher vaccination rates, the new wave is somewhat contained, although not uniformly; new cases and hospitalisation rates remain a key factor to watch for risks of new lockdown measures.
Growth forecasts revised down. We expect World GDP to grow by between 5.8% and 6.4% this year and by 3.8% and 4.5% in 2022. China’s growth profile has been downgraded as production, consumption and investment all disappointed recently. We now expect Chinese GDP to grow by between 8.4% and 9% this year and between 5.1% and 5.7% next year. US growth has been revised down too within a range of 5.8% and 6.2% this year and 3.3% and 3.9% in 2022. (Amundi’s forecasts are available on in the section Macroeconomic picture.)
We downgraded our US and China growth expectation for this year and next
Inflation risk remains. Continued supply constraints and increasing headwinds from supply bottlenecks are weighing on activity and trade in goods. These factors are creating pressure on global inflation, as shown by the recent data. However, recent PMI input and output prices hinted at some moderation, while remaining very high. We expect inflation to remain above the Fed target over the forecast horizon for the US but the FOMC should stay on hold. Several EM central banks have started to increase policy rates as inflation numbers have been above target.
1.2. The euro area uneven recovery
The euro area economy expanded by 2% in 2Q21, leaving the region’s GDP just 3 points below its pre-pandemic level. However, the rebound was not uniform across countries. There were differences in the timing and extension of restrictions in the first part of the quarter, with a delayed reopening in Germany and France. Different impacts from supply and capacity constraints in the manufacturing sector impacted the speed of rebound and are likely continue playing a role in Q3. The pace of growth of Italy and Spain in Q2 was much stronger than the euro-area average. This allowed Italy to close the GDP gap with Germany and France, while Spain narrowed the gap still lags behind (see chart 1).
Italy is closing the gap with France and Germany
1.3. A brighter outlook for growth and inflation
The near-term outlook for the European economy looks brighter than expected in spring. We expect the recovery to continue in a multi-speed manner among member states, but it should benefit from positive spill-overs from strong momentum in internal demand and US growth. Overall, we expect GDP to peak in Q2/Q3 (reopening, vaccination campaign growth momentum and effects of national fiscal support among the key drivers) followed by above potential growth as the NGEU projects kick in (effects from 2022). We expect growth to average 4.7% in 2021, 4.1% in 2022, and 2.3% in 2023, reaching pre-pandemic levels in the first quarter next year. Germany, France and Italy should revert to pre-crisis levels at the beginning of 2022, with similar timing, while Spain should close the gap some time in H2 2022.
We don’t expect the wage factor to play a major role in the euro area
Our forecast for inflation this year has also been revised upwards, retaining a humpshaped profile. The developments in Eurozone inflation partly follow the common trends at play in other DMs: energy is playing a major role in the year-over-year dynamics, together with other base effects on the anniversary of the first lockdown and subsequent rebound. On a monthly basis, the increase in prices due to demand supply friction (bottlenecks, supply disruption, reopening mix) is also at play. Yet, not all countries follow similar patterns, due to idiosyncratic factors, such as the temporary VAT cut in Germany, which is likely to contribute to a significant overshoot in inflation in Q4 this year, and changes in the timing of seasonal sales, which introduced volatility in France and Italy over the summer period.
Contrary to the US, we do not expect wage growth factors to play a major role going into next year. While we expect EA inflation to overshoot the ECB target this year, it should revert below target in 2022. Amundi’s average Euro-area CPI headline annual rate assumptions are: 2021@ 2.2%, 2022@ 1.8%, 2023@ 1.6%.
We believe that the sharp rebound of the UK economy in 2021 (from 6.3 to 6.9%) will be followed by another year of strong growth (4.5 to 5.1% in 2022). Growth should then come back below 2.4% in 2023. British inflation should be in line with the euro-area this year and remain moderately above target into 2022. Reopening factors and Brexit related issues explain this higher level of inflation. However we assume that the BoE will stay on hold over the next 12 months.
1.4. Consumption and investment recovery
Consumption and investment followed a different recovery pattern after the collapse in 2020. While private consumption declined during the subsequent lockdowns, Q1 2021 for instance, reflecting a drop in the purchase of both durable goods and services, investment continued to expand, supported by a positive impulse from construction.
Looking at available data for Q2, the recovery in investment seems to be almost completed while household consumption still lags behind, with the recovery in goods more advanced than that in services. As a broader range of spending opportunities becomes available again with the reopening and household purchasing power remaining broadly resilient, we expect the consumption of services to play a key role in the recovery.
Concerning investment, as of Q1, construction recouped almost completely the gap in relation to pre-Covid levels, but machinery and equipment investment still lags behind. Thanks to the boost provided by the new wave of investment driven by the national resilience plans and the NGEU, we expect both construction and fixed capital formation to accelerate and strongly contribute to growth.