The Global Economy Is Shrugging Off the Delta Variant. For Now.

Fingers crossed...JL 

Simon Kennedy reports in Bloomberg:

Even as delta risks loom, early signs from the third quarter show growth accelerating and inflation peaking after its recent jump, a reassuring sign for policy makers and investors. Global gross domestic product in the third quarter is on track for a 1.8% expansion from the previous three months. That’s an improvement from the previous quarter, and leans against fears that the delta variant will slow the recovery from last year’s recession. Consumer prices are set to advance at a less troubling pace, as inflation in the U.S. peaks and then eases back from elevated summer readings

Even as delta risks loom, early signs from the third quarter show growth accelerating and inflation peaking after its recent jump, a reassuring sign for policy makers and investors worried about the risks of faltering demand and surging prices.

Global gross domestic product in the third quarter is on track for a 1.8% expansion from the previous three months, according to a “nowcast” from Bloomberg Economics. That’s an improvement from the solid pace in the previous quarter, and leans against fears that the delta variant will slow the recovery from last year’s recession.

At the same time, consumer prices are set to advance at a less troubling pace, as inflation in the U.S. peaks and then eases back from elevated summer readings. That will be welcomed by central bankers such as Federal Reserve Chair Jerome Powell who had bet the inflation spike would prove temporary.

“Nowcasts can’t see into the future and the delta variant means the picture could change quickly,” said Bjorn Van Roye and Tom Orlik, economists at Bloomberg Economics. “For now though, the data is flagging a positive start to the third quarter, with the global recovery accelerating, and inflation moderating.”

Back on Track

For the world as a whole, output is recovering back toward the pre-pandemic trajectory

From U.S. retail sales to China factory output, Bloomberg Economics nowcasts bring together hundreds of data points to provide a high frequency read on the pace of growth across major economies ahead of the official GDP data.

Beneath the robust headline number for global growth, the country nowcasts reveal economies at very different stages of recovery:

- China — with its rapid control of the virus, and the U.S. — with its outsize stimulus, have pushed output above the pre-pandemic peak, allowing them to claim credit for driving the global recovery.

- The euro-area and the U.K., in contrast, still have lost ground to make up. In Japan, a slow vaccine roll out means the recovery is lagging.

- One thing the nowcasts can't capture — future changes in policy and behavior as countries respond to the evolving Covid-19 pandemic.

The zigzag recovery in India illustrates how fast things can change. China now faces renewed risks as the government battles to contain the delta outbreak. And Southwest Airlines Co. said on Wednesday that the pickup in virus cases is hurting U.S. bookings.

As for inflation, some worry its rebound from the recession will prove long-lasting, limiting the scope for central bankers to maintain stimulus and distracting them from their focus on healing labor markets and the broader economy.

But the Bloomberg Economics nowcast models suggest some room for confidence:

- In the U.S., summer readings for the consumer price index pushed past 5% year on year — way outside the Federal Reserve’s comfort zone. The nowcast suggests pressures are set to peak and begin edging down in the third quarter.

- The euro-area — further behind in the recovery but with the pace of growth still accelerating — is expected to see inflation picking up, but not to such elevated levels as those seen in the U.S.

- In Japan, price gains in the third quarter are expected to flatline at 0.1% — a reminder that after temporary frictions from reopening have dissipated, the more serious problem for the world’s central bankers may still be not too much inflation but too little.

Plateauing Prices

U.S. inflation is set to peak and then moderate in the third quarter

For the world’s biggest central banks, a recovery on track and inflation risks passing means they will be in no hurry to make major moves.

Even as interest rates stay on hold, though, officials are starting to shift other pillars of economic support.

Staying the Course

Most policy makers are in no hurry to change rates before year's end

Note: Mapped data show expected rate moves for distinct central banks.

Sources: Bloomberg Economics and ECFC survey numbers for Poland, Switzerland and Czech Republic

- The Fed is expected to begin its taper of bond purchases in early 2022, and may provide further clarity on what that will look like as soon as the Jackson Hole Symposium, starting August 26.

- The European Central Bank may move in the other direction. A recent change to its communications flagged greater tolerance for inflation, opening the possibility of amped-up asset purchases.

- In China, the central bank has already moved to head off a slowdown in growth by freeing up more funds for banks to lend. It’s possible the delta variant outbreak could force it to do more.

- In emerging markets, a faster than expected recovery in activity, driven by significant fiscal stimulus, has already pushed a number of central banks to begin normalizing policy. Russia and Brazil have already started hiking rates.