Global economic boom

The spread of the delta variant of COVID-19 is unlikely to stop the economic upturn. Quite the opposite: The latest data suggests that economic growth in the eurozone is yet to hit its peak and Germany is leading the field.

The delta variant of COVID-19 is spreading across Europe. This is causing many people to feel increasingly uneasy – concerned that they may have to cancel or postpone their long-anticipated holidays once again as yet another round of lockdowns looms. In addition to public health concerns, the prospect of further economic damage is causing alarm. But the capital markets seem largely unfazed so far.

In part, this can be explained by the fact that decisions on potential new containment measures would be guided not only by the number of infections, but also by the rate of hospital admissions and intensive care capacity in hospitals – neither of which are currently at critical levels. Another factor is that the vast majority of people in high-risk groups, such as the elderly and those with underlying health conditions, have now been fully vaccinated. The further spread of the delta variant could weigh on certain sectors such as tourism, hospitality and air travel, but this should have only a marginal impact on the continued economic upturn – provided that no variants emerge that are resistant to existing vaccines.

The market still expects the unprecedented economic recovery that is currently unfolding to continue. And the latest macroeconomic data from the eurozone and the US provides compelling grounds for this expectation.

Eurozone economy is booming

Based on the final figures published this week, the Markit/BME purchasing managers’ indices in the eurozone reached a 15-year high of 59.2 points in June, up from 57.1 points in May. Sentiment in the service sector saw particularly strong improvement in light of further reopening measures in many countries, meaning that the gap between the figures for the manufacturing sector and the service sector is narrowing. Recently, many manufacturing companies had been voicing concerns about bottlenecks in the supply of important intermediate products and difficulties in finding qualified staff. As a result, purchase prices rose more steeply than ever. Many respondents indicated that they were planning to pass the higher costs on to their customers. This may drive prices up temporarily, but we still believe that the upward pressure on prices will diminish again in the medium term once supply shortages have been resolved.

Upturn in the eurozone

Purchasing managers' indices (left-hand axis)/ indexed GDP growth (right-hand axis)

Upturn in the eurozone
Source: Refinitiv, *right-hand axis, UI quarterly forecast, as at 2 July 2021.

German economy is leading the field

Germany is a case in point. The country’s purchasing managers’ index climbed to 60.4 points. The ifo index provides an even clearer picture of the economic recovery in Germany. While the PMI treats longer supply lead times as a positive indicator of a strong economy, the ifo business climate index does not take lead times into account. The ifo index, which is also based on a survey of managers regarding their assessment of their current situation and business prospects, rose from 99.2 points in May to 101.8 points in June. Similar to the PMI data, expectations ahead of publication had been lower.

At the same time, the consumer sentiment index of German market research company GfK showed that optimism among consumers is growing. In June, the index climbed by 6.6 points to -0.3 points. Consumers are anticipating rising levels of income and are keen to spend more again. This is consistent with a stronger-than-expected decline in unemployment in June. People who are employed are more inclined to spend money. Consumers’ propensity to spend is currently still lower than before the crisis, but this is good news for the further economic recovery, as it means that there is still significant upward potential.

This data provides the framework for the eurozone’s explosive economic growth. As predicted in our forecast for the year, the European economy kicked back into gear in the second quarter and should gain further momentum in the third quarter.

Economic recovery in the US peaks

While the eurozone economy continues on an upward growth trajectory, US indicators such as the latest PMI data show that growth there – while still at a very high level – is starting to slow. The recovery phase is continuing, but sub-components such as orders on hand are no longer rising quite as rapidly as in previous months. Nevertheless, indicators remain at very high levels in historical terms. Recent data shows that retail sales weakened slightly and disposable income declined a little. However, in previous months, these figures had been distorted by government-issued stimulus cheques for private households. US consumers remain in an upbeat mood and are planning to make larger expenditures.

US: indicators at a high level

Purchasing managers' indices ISM* (left-hand axis)/indexed GDP growth (right-hand axis)

US: indicators at a high level
Source: Refinitiv, *right-hand axis, UI quarterly forecast, as at 2 July 2021.

All in all, the engine of economic growth is purring as it makes its way around the globe. After take-off in China and a stopover in the US, it is now heading to Europe. With more and more regions adding momentum to the recovery, we should be seeing sustained economic growth, as predicted in our forecast at the start of the year – provided that no COVID-19 variants that are resistant to current vaccines put a spanner in the works. For 2021, we anticipate economic growth at rates of 6.7 per cent in the US and 5.1 per cent in the eurozone.


As at: 5 July 2021