EC April 2021 Monthly

Four major forces shaped the investment climate in the first quarter: the evolution of the virus and the rollout of the vaccine, the rising long-term interest rates driven by higher oil prices, America’s large fiscal stimulus, and optimism about the outlook, a sharp divergence between the US and other high-income countries, and a recovery in the US dollar after sliding in November and December 2020. These forces will continue to dominate at the start of the second quarter. 

Among the G7 countries, the UK and the US have been the most successful in vaccinating their populations, though as the EC has argued, its production facilities and trade policy, allowed it to export to the UK around 2/3 of its vaccines. It appears that while the EU has the vaccine-producing capacity, it did not partner with the private sector producers the way the US and UK did and backed laggards in the race to produce a vaccine. The UK has contracts with the right producers, but it does not have much manufacturing capacity, to produce the vaccine, and must rely on the friendly-export policies of others, like the EU and India, which may be coming to an end. The US has both manufacturing capacity and contracts. It is possible that before the second quarter is over, the shortage of vaccines turns into a surfeit in the US.  

The UK has a four-step plan that will lead to the complete re-opening of the economy by the first day of summer, and it has begun being implemented. In the US, states are under pressure from the Biden administration to make vaccines available for all adults by the beginning of May, with the hope that by Independence Day, a couple of weeks into the summer, that a return to normalcy may be considered. The vaccine rollout in Europe has been terribly disappointing for various reasons, and not all of which are the fault of their own decision-making, and this may be helping to facilitate a new wave of the virus. Several EU members have extended some social restrictions well into April. Also, the entire experience, including “vaccine diplomacy” and medical nationalism, will encourage countries to maintain or secure their own production capability in medical supplies and some medicines, including, apparently, mRNA capacity. Of course, it will be a “necessity.” that only large and/or rich countries will be able to afford. 

Benchmark 10-year yields have risen sharply in the quarter, and perhaps, counterintuitively, the roughly 80 bp rise in the US 10-year was not the most among the developed countries. The honor goes to Canada with an 86 bp increase in the 10-year yield. Australia and New Zealand yield increased by a little more than 80 bp. The UK’s nearly 65 bp increase was more than twice the increase of most other European countries, including Germany and France. Italy's benchmark 10-year yield rose by about 12 bp. However, in March, the divergence was clearer. The US 10-year yield rose by 30 bp, and 20 bp in Canada. Yields in the large eurozone countries increased by less than five basis points, the UK’s by seven basis points. Japan and China’s 10-year yields slipped five-six basis points. 

Surveys seemed to confirm the elevated expectations, which is what nearly all the central banks noted in explaining the rise in yields. However, oil is a traditional driver of inflation expectations, and until last month, an under-appreciated driver of higher yields. The price of light sweet crude oil rose by more than 60% between early November US elections and vaccine announcement to the end of February, while the price of Brent oil rose by more than 75%. Oil prices consolidated in March.  

Most G7 countries likely contracted in Q1. The US is a notable exception and between the December 2020 fiscal stimulus ($900 bln) and the rebuilding of inventories, economists are projecting around 6% growth (at annualized pace), for which the first estimate will be available at the end of April. Canada also appears to have expanded in the first part of 2020. The Bundesbank warned of a German contraction in Q1, but the PMIs this may have been avoided. China will report its Q1 GDP in the middle of April. Growth may stay above pre-Covid levels, helped by strong net exports, but the high-frequency data is consistent with a downshift in growth from the 2.6%-3.0% seen quarterly in the H2 20. 

Between the US stimulus at the end of 2020 and the new package approved last month, the US is committed almost 14% of GDP to the efforts. The OECD was so impressed that the US fiscal efforts were the single biggest factor in revising up its 2021 forecast for world growth.US growth itself was lifted by 3.8 percentage points. It might be worth about one percentage point for Canadian's growth and half as much for the eurozone and Chinese economies.  

The next big economic initiative will be on the infrastructure. The Biden administration argues that in order for the US to compete more successfully, and especially to respond to China’s challenge, there is work to do at home, and this includes better and more sustainable transportation, communication, and power infrastructure. It also requires a greater and more equitable investment in upgrading the skills of the workforce. The price tag could be $2-$4 trillion, and at least some of it may be paid by corporations and high-income households.  

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Moon Kil Woong 1 week ago Contributor's comment

At least in the US the spending will be a lower percentage and it will go to things that will accelerate the economy more. Hopefully, things will be better next year. The focus should not be on balancing the budget but getting thing back on track. The economic error was before not balancing the budget and saving while in better times.