Five Lessons From Reopening So Far

In this update from Capital Economics they identify five things that have been learned from reopening so far. Some were anticipated, including the rapid rebound in activity once restrictions were removed and an easing of trade growth as output in advanced economies resumed. But others have been more surprising, particularly the extent of supply shortages in some economies which have led us to temper our optimism about future growth.

The first lesson is that we were right to be more optimistic than the consensus about the pace of recovery once restrictions were removed. Most economies experienced something like V-shaped revivals in output and the upturn was fastest where strong policy stimulus was also applied and/or virus numbers were quickly brought under control – notably in China and the US.  

The second is that the recovery is uneven across sectors. Industry and retail have both recovered. But activity in other services including the hospitality and transport sectors is still far below previrus norms due to continued restrictions and voluntary avoidance of such activities.

The third related lesson is that consumption patterns were skewed by the pandemic but may be starting to shift back. Spending on goods and services fell relative to incomes at the start of the pandemic, but goods spending recovered faster. Households were able to switch their spending from things like clothes (which they didn’t need) to things like electronics (which they did), benefitting the emerging economies that export these goods. There are now early signs that this is starting to unwind as restrictions on services are lifted: the latest US monthly consumption data has shown a decline in spending on goods and Chinese exports of goods like furniture and electronics have flattened off.

However, the shift in trade patterns is likely to be a slow process. Consumers’ hesitance to resume certain activities will limit the pace of recovery in services spending. Meanwhile, healthy incomes growth and elevated household saving rates in Developed Markets should mean that goods spending slows rather than slumps.

The fourth lesson is that the narrative about global supply shortages misses some important differences between economies. There have been various worldwide goods shortages, including semiconductors, lumber and cement. But these have limited output most in economies that have reopened quickly and had large amounts of stimulus. Supply constraints seem to have been behind recent disappointing data from both China and the US.

Labour shortages have also varied markedly depending partly on the design of income support schemes. The euro-zone and UK schemes were probably best designed – they prevented major layoffs and, with both economies now recovering strongly, we think the danger of a surge in unemployment as the support is phased out has passed. Furloughed workers can be recalled relatively easily as businesses reopen. But in the US, and to a lesser extent Canada, enhanced unemployment benefits seem to be having bigger disincentive effects and exacerbating labour shortages.

The consequence is that several recoveries, most notably those of the US and China, are slowing sooner than anticipated after the bounce from reopening. The shortages of labour and other inputs to production are likely to persist this year before easing next year. But the previous strength of recoveries in the US and China means that their shortages are likely to be more acute and longer lasting. We have revised down our forecasts for both economies in recent months and now sit below consensus in both cases for 2022.

The fifth lesson is that inflation has surprised on the upside almost everywhere, but the extent to which this will be sustained looks set to vary greatly. In most major economies, the bulk of the increase since February can be attributed to base effects – i.e. prices falling a year earlier rather than prices rising sharply in 2021. These foreseeable effects have boosted energy inflation and also inflation in pandemic-hit goods and services like hotels and airfares. This pressure should be temporary for most.

However, in a handful of economies more permanent factors have been at work. The US has seen a rise in cyclical components such as rents. Meanwhile, labour markets tightness looks set to put strong upward pressure on wage growth in the US, Australia and New Zealand. Central banks of these economies are likely to act sooner than those of other Developed Markets, although even the Fed and RBA are unlikely to raise interest rates until 2023.

An article by Jennifer McKeown, Head of Global Economics Service, Capital Economics - 20th July 2021

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