Global Economics Intelligence executive summary, July 2021

Industrial activity strengthens and consumer demand returns while inflation accelerates; the pandemic wave worsens significantly

The COVID-19 pandemic worsened in recent weeks, as the Delta variant of the virus spread to more countries and the total number of cases officially logged soared past one-half million per day. In the last four weeks, active cases globally have risen from 11.3 million to 14.1 million. The number of deaths is also rising, and is now about two-thirds as high as it was at the peak of the previous wave (in April). Greater vaccine availability in some Western countries has raised hopes that renewed restrictions can be avoided. However, health authorities and governments are struggling to gain the cooperation of the willfully unvaccinated. As the virus spreads, the potential rises for a vaccine-resistant strain to emerge. Meanwhile, in poorer countries, vaccines are scarce and most populations are little protected (Exhibit 1).

The pandemic has worsened in recent weeks, as the number of new cases of COVID-19 once more climbs past half a million daily.
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The effects of this latest pandemic wave on the global economy remain to be seen and measured. In the previous months, economic data have been positive on the whole, as economies have reopened. In the second quarter of the year, the US economy returned to its prepandemic size, expanding at an annualized rate of 6.5%. During the same period, the Chinese economy’s annual growth rate was 7.9%. The renewed moment is partly due to the return of consumer demand, which has been a question mark in the recovery so far. Consumer confidence indicators strengthened both globally and in individual surveyed economies. The more positive outlook was reflected in retail spending, which has approached prepandemic levels (Exhibit 2). In the United States, sales increased 0.6% in June and in the eurozone, sales rose 4.6% in May (m-o-m). Both results exceeded expectations; similar trends were measured in Brazil and Russia. In China, retail sales climbed 12.1% in June compared with levels in June 2020—a time when China’s economy was fully open but consumers were still cautious.

Consumer demand has returned in most surveyed economies, with retail spending now approaching prepandemic levels.
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Manufacturing continues to lead the recovery, but lately services have been expanding too. The global purchasing managers’ index (PMI) for manufacturing has been in expansion territory for a year, but accelerated in the past four months, reaching 56 in May and 55.5 in June. Likewise, the global services PMI reached 59.6 in May and 57.5 in June. These are the highest global PMI readings seen in over a decade. Individual PMIs are also mostly showing expansion, with strong manufacturing and services readings in the US, the eurozone, and Brazil. Industrial momentum faltered in India, however, which was hit by the new pandemic wave harder and earlier than other surveyed economies. This picture is reflected in the leading indicators of the Organization for Economic Co-operation and Development (OECD), which point to above-average growth for all surveyed economies in the coming months except India’s (Exhibit 3).

The OECD’s leading indicators point to above-average growth for most surveyed economies in the coming months.
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Trade momentum continues, especially as supply bottlenecks continue to open. The CPB World Trade Monitor measured slightly lower trade levels in May (–0.3% m-o-m) and April (–0.1%), but with March’s high, these are the three highest readings ever recorded by this indicator. The Container Throughput Index rose by 2.3 points in May to 128.6, another record reading; increased container traffic in Chinese ports was the main source of the growth. Trade data from individual surveyed economies in May mostly reveal monthly decreases but levels are still above the 12-month trend.

As mentioned in the previous GEI report, inflation is on the rise, stoked by renewed economic activity, government stimulus, and residual supply dislocations from the pandemic restrictions in 2020. In the United States, consumer inflation climbed to 5.4% in June (5.0% in May), driven up recently by higher fuel prices. The consumer inflation rate is high in Brazil (8.4%), India (6.3%), and Russia (6.5%), and is above the targets of central banks in all surveyed economies except in the eurozone and China (where consumer inflation is only 1.9% and 1.1% respectively). Producer price indexes have also climbed to rare heights (Exhibit 4). A recent agreement by the OPEC-plus countries should help ease oil prices, which have lately hovered around $75 per barrel (Brent). The prices of commodities and industrial metals are likewise high compared to prices in the prepandemic period, but these have changed little in recent weeks.

Consumer inflation is high and rising in Brazil, India, Russia, and the United States; producer-price inflation is high in all surveyed economies.
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In Brazil and Russia, central banks responded to inflation by raising policy interest rates, to 4.25% (Selic rate) and 6.5% respectively. At its end-of-July meeting, the US Federal Reserve refrained from raising its near-zero policy rate (0–0.25%) and only suggested the possibility of tapering its bond-buying program if the economy continues to strengthen. The People’s Bank of China, meanwhile, loosened its policy by lowering the required reserve ratio for all banks, potentially releasing RMB 1 trillion in liquidity.

Inflation has caused extra hardship in Brazil, where the unemployment rate remains at its historic high of 14.7%. Elsewhere, official unemployment rates decreased in Russia and the eurozone, where the overall rate of 7.9% includes low rates in the Netherlands (3.2% in June) and Germany (3.7% in May) but much higher rates in France, Italy, and Spain. In the US, official unemployment ticked up to 5.9%, still above the prepandemic mark of 3.5%.

In the financial markets, stock indexes wobbled in July but by the end of the month mainly recovered gains made in June; stock indexes in the US, Europe, Brazil, and India continue to set record-high marks. Volatility indexes have kept to a downward trajectory in recent weeks. The US dollar gained against other currencies; the Brazilian real made significant gains until late June, when it lost some value.

Finally, the threat to human life and economic activity posed by climate change has been underscored by recent severe weather events. In June and July alone, extreme rainfall and destructive flooding struck Western Europe and central China, unusually damaging monsoon rains fell in India and the Philippines, and severe drought and massive wildfires are again gripping western North America. These are the events that climate scientists warn will become more frequent and severe in the coming decade.

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