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The ECB’s new monetary policy strategy – a small important step in the right direction

In July of this year, the European Central Bank published the results of its monetary policy strategy review. Since the previous strategy dated back to 2003, an adjustment was imperative. The new monetary policy strategy takes into account developments since the financial crisis and incorporates many of the monetary policy innovations that the ECB had already introduced in practice in response to the various monetary policy challenges since 2007.  A large part of the innovations were expected and also led to few reactions in the financial markets. The two most important modifications probably concern the inflation target and the thematization of the influence of climate change on monetary policy.

The previous target of an inflation rate “close to, but below, 2 percent” was adjusted to a symmetric 2 percent target in the medium term. Short-term deviations to the downside or upside are accepted, provided they are classified as temporary. This clearly states that under- and overshooting are equally undesirable. This is important, for example, in the current phase of economic recovery and temporary inflationary pressure; the modified strategy ensures that the ECB does not have to put the brakes on monetary policy prematurely. This is probably a way to avoid past mistakes. For example, after the financial and economic crisis subsided, the ECB probably began to make monetary policy less expansionary too early, thus putting the brakes on the economic recovery.

The ECB’s modified monetary policy strategy is moving in a similar direction to the strategy of the U.S. Federal Reserve, which was adjusted in August 2020. The latter is now pursuing an average inflation target of two percent, with a temporary undershooting of the inflation target to be compensated for by a moderate overshooting thereafter.  The ECB chose a less clear-cut approach by merely stating that the inflation target should be achieved in the medium term. The ECB thus remains somewhat more flexible than the U.S. Federal Reserve in the way it deals with temporary deviations from the inflation target. As with the Fed, however, the ECB is also unclear about the width of the tolerance band around the two percent target. However, the new ECB strategy avoids one source of uncertainty. For example, in the Fed’s new monetary policy strategy, it is not clear to which period, for example, past undershooting refers and how aggressively it should be compensated thereafter to achieve the average inflation target.

A second important element of the ECB’s adjusted monetary policy strategy is the explicit mention of climate change and its importance for monetary policy. In its new strategy, the ECB acknowledges that climate change and the transition to a more sustainable economy may affect inflation, economic growth, or the transmission of monetary policy. In any case, climate change or, for example, the design of a CO2 emissions trading scheme directly affects the risk profile of assets on the Eurosystem’s balance sheet.

The ECB has announced that it will review its monetary policy strategy more frequently in the future. This will provide the opportunity to correct possible weaknesses in the new strategy at an early stage and to react to new developments. 

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Japan: Economic recovery remains subdued

In Japan, economic output slightly expanded in the second quarter of 2021. The pandemic and measures to contain it continued to dampen economic activity. All in all, I expect that the Japanese economy will grow only moderately (when compared to other countries) in the current year mainly due to the slump in economic output in the first quarter and a relatively subdued recovery. Gross domestic product will – according to my forecast – increase by 2.1 percent in the current year. In 2022, I expect a growth rate of 2.7 percent.

In Japan, gross domestic product increased slightly by 0.3 percent in the second quarter of 2021 compared with the previous quarter, after the economy had still contracted by 0.9 percent in the first three months of the year in the face of widespread pandemic containment measures. The Japanese economy has thus returned to a subdued growth path. Private investment in particular developed strongly in the second quarter, but household consumption expenditure also increased at a solid rate. The marked growth in domestic demand led to significantly higher imports, which increased more strongly than exports, which also rose.

Growth is expected to accelerate only slightly in the second half of the year. The spread of the delta mutation is still dampening further economic development in Japan to a slightly greater extent than in other developed economies – partly because, due to a delayed start to the vaccination program, the vaccination rate is still lower than in other developed economies. In July and August, corona case rates and intensive care unit occupancy rose significantly after a decline in the spring. Containment measures were tightened again in some regions – including the Tokyo capital region. In particular, people were urged to stay at home and switch to home-based work if possible. Business sentiment and consumer confidence had improved somewhat in early summer, but are now expected to deteriorate again somewhat in late summer and fall. Economic development continues to be supported by noticeable growth in foreign demand, although export growth rates are likely to be somewhat lower than in the first half of 2021 due to problems with international supply chains and the global spread of the delta mutation. The Olympic Games at the end of July and beginning of August are unlikely to have provided any noticeable economic impetus; due to the pandemic, hardly any foreign visitors arrived. Uncertainties exist with regard to the outcome of the Japanese parliamentary elections, which must be held by November. The popularity of Japanese Prime Minister Suga has worsened, in particular because of the pandemic management, which many people perceive as inadequate. However, fundamental changes in economic policy are not to be expected regardless of the election outcome.

Expansionary fiscal and monetary policy will continue to support the moderate recovery process of the Japanese economy. Financing conditions for companies will remain favorable and stimulate investment. Further impetus for corporate investment will also come from the fiscal stimulus package adopted last year, which includes measures in the area of digitization and the promotion of “green” energy sources.

Not only the additional fiscal policy measures but also the good situation on the labor market are likely to support household incomes. Despite the economic slump, the official unemployment rate has increased only slightly since the outbreak of the pandemic; in June 2021, the unemployment rate was only 2.9 percent, after having increased in the meantime from 2.2 in December 2019 to 3.1 percent in October 2020; above all, the government’s short-time work program and the reluctance of Japanese companies to lay off workers have probably prevented a stronger increase in unemployment.

Advances in the vaccination campaign and economic policy stimulus keep the Japanese economy on a moderate recovery path despite the dampening effect of the delta mutation and problems with international supply chains. Gross domestic product is likely to grow by 2.1 percent in the current year. In 2022 and 2023, growth rates are likely to be 2.7 and 1.5 percent.

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U.S. economy: The recovery continues, but high growth rates are over for the moment

The U.S. economy grew significantly by 1.6 percent in the second quarter of the current year compared with the previous quarter (annualized 6.6 percent). The economic recovery after the pandemic-related slump in the first half of 2020 thus continued; gross domestic product had already increased at a similar rate in the first quarter. In the meantime, economic output has returned to the level of the final quarter of 2019 before the pandemic. Private consumption in particular increased significantly in the second quarter, but business investment activity was also strong. New Corona infections declined steadily through the end of June and the vaccination program progressed well by international standards. In the wake of these developments, infection control measures were gradually relaxed in the states. This benefited personal services in particular, which grew at strong rates. However, industrial production also increased noticeably.

In the third quarter, the economy is expected to grow at a similar rate to the first half of the year. The purchasing managers’ indices were still well above the expansion threshold of 50 index points in July, but do not indicate any further acceleration in economic growth. Consumer sentiment – as measured by the indices of the Conference Board and the University of Michigan – however got less optimistic recently. It might be a temporary deterioration due to the increase in Covid cases. But it might also indicate a gradual moderation of economic activity in the coming months.

Obviously, the pandemic is not over yet. In the second half of the year, the economy in the United States is likely to continue to grow with momentum, but growth rates will probably be somewhat lower in the fall and winter than in the first half of the year. Corona case numbers have risen significantly again during the summer in several states against the backdrop of the delta mutation now dominating. In addition, progress in the vaccination program has – at least temporary – slowed down due to vaccination skepticism in some regions. As of mid-August, the rate of fully vaccinated persons in the United States is slightly more than 50 percent; however, vaccination rates are sometimes much higher among at-risk groups and in metropolitan areas. Although strict containment measures are unlikely, as they were last winter, the economic recovery is nevertheless being somewhat dampened by the spread of the delta variant.

The fiscal packages adopted in December and March – amounting to around 13 percent of GDP – are still having a stimulating effect, and boosting private consumption and demand for residential property in particular. However, the stimulating effect is likely to gradually diminish in the coming quarters.  But consumer demand will still be the main growth driver of the US economy in the coming quarters. In 2022 and 2023, growth in private consumer spending will weaken further but still increase at solid rates. Against this background, business investment will also increase noticeably. Although corporate financing conditions are likely to become less favorable than recently, but will continue to support companies’ propensity to invest.

The dynamic recovery of the US economy has also continuously improved the situation on the labor market. The unemployment rate was only 5.2 percent in August, down from 6.7 percent last December and as high as 14.7 percent in April 2020. However, many people have withdrawn from the labor market, at least temporarily; the labor force participation rate in August was considerably lower than before the pandemic in February 2020, so the official unemployment rate might underestimate the true extent of unemployment by roughly 1 ½ percentage points.  The labor market situation will continue to improve. In 2022 and 2023, however, the decline in the unemployment rate is likely to be much smaller than recently.

Monetary policy will remain expansionary – partly because the central bank’s revised monetary policy strategy in August 2020 will allow inflation to overshoot moderately above the average target of two percent. This year, inflation is likely to temporarily overshoot this target by a significant margin. However, much of the higher inflation is due to temporary factors such as higher oil prices compared with 2020, as well as supply bottlenecks and associated price increases for various goods – such as semiconductors and raw materials. For example, a shortage of semiconductors has caused production delays in car manufacturing, which led to exceedingly sharp price increases in the market for used cars in the spring of 2021. The index of personal consumption expenditures published by the Bureau of Economic Analysis, which the U.S. Federal Reserve primarily uses for its monetary policy decisions, is expected to increase by nearly four percent this year. The consumer price index published by the Bureau of Labor Statistics is also expected to rise temporarily to roughly four percent on average for the year 2021. As the temporary influences on prices gradually fade, the inflation rate will also gradually decline. However, in view of continued dynamic domestic demand for the time being, inflation is likely to remain above two percent in 2022 and not return to below two percent until 2023.

In view of the favorable economic recovery and somewhat higher inflation, it is to be expected that the U.S. Federal Reserve will gradually begin to make its monetary policy less expansionary at the end of the current year. This will probably initially involve a gradual reduction in monthly securities purchases, which currently amount to $120 billion. The first interest rate increases may then be expected towards the end of 2022. All in all, the US economy will probably grow by 6.0 percent in the current year. In 2022 and 2023, growth rates are likely to be 3.9 and 2.1 percent respectively. 

Email: info@eagle-economist.com

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The pandemic, productivity, and the future of work – short reflections

What happens after the pandemic? This question has been asked many times since the beginning of 2020. Probably, this question is somewhat misleading, because the corona pandemic will pretty much not be over at a certain moment. It will probably – and hopefully – slowly subside, but the virus will likely remain among us, challenging us sometimes more strongly, sometimes more weakly like a cold. It is great that we have vaccines and better treatments available.

As for the future of work and economic development, there are hopes and fears associated with the pandemic. Two points seem particularly important to me:

  • The pandemic has driven digitization in many countries. Jobs – especially so-called office jobs – can now be done more flexibly. As a result, it is likely that productivity will increase. That would be good, because many countries have had low economic growth in recent years, which has made it more difficult to deal with challenges such as climate change or demographic development. These come at a high cost, which can be better managed if a country becomes more prosperous economically. Higher productivity and taking advantage of the opportunities arising from digitization should also make it possible, among other things, to improve the compatibility of work and family life as well as gender equality.
  • However, the change in work is associated with structural challenges. Companies are reorganizing and it is important to see that the changes will have both positive and negative sides. Employees who work from home, for example, will face wage losses. Employers argue, for example, that working from home is associated with lower costs for commuting or for expensive apartments near the center. In addition, more jobs could be relocated entirely to other regions or countries where wage costs are lower. In some cases, this is already the case. Thus, this development is producing winners and losers.

In general, while these developments are probably overall positive, one should not forget the downsides and the losers. Our societies face quite big structural changes.

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The Italian Economy: Will the soccer champion also be an economic powerhouse? Forza Italia!

Italy has been in a difficult economic situation for many years. The pandemic made the economic and social problems even worse. Nevertheless, I am optimistic for Italy and the Italian economy. Despite various remaining problems, there is hope for new dynamism after the pandemic and several reasonable reforms. The Italian soccer team recently won the European Championship. Of course, this is not more than a symbol. But it should remind us of the many strengths of Italy including, among others, a high average skill level in the population. After an economic contraction of almost 9 percent in 2020, I expect an economic expansion of 4.5 percent in 2021 followed by a growth rate of 5.3 percent in 2022. Certainly not the highest growth rates in Europe, but nevertheless a solid performance. Forza Italia!

The coronavirus pandemic caused a health crisis and a severe recession in Italy. Many people died from the virus. Gross domestic product dropped by 8.9 percent in 2020 and the situation on the labor market remains difficult. In February 2020, Italy was the first European country that was severely hit by the Covid-19 pandemic and the first European country to impose a strict lockdown. As elsewhere, travel, tourism, hospitality, entertainment and many other sectors of the economy were hard hit. As expected, a fast recovery started during the spring of 2020. However, a fast increase in Covid-19 cases in the fall of 2020 again led to various strict measures to contain the pandemic. In the course of the spring and summer, many of these measures could be gradually removed. The availability of vaccines greatly helped improve the situation. In addition, the beginning of the summer also contributed to bringing infection rates down. However, it might be that virus mutations will make the situation worse again. The so-called delta mutation is a warning sign. Some or all the available vaccines might not be fully effective against new mutations.

After the Italian economy had expanded by 15.9 percent in the third quarter of 2020 (after drops of 5.7 percent in the first quarter and 12.9 percent in the second quarter), output again contracted at a rate of 1.8 percent in the fourth quarter of 2020 and stagnated in the first quarter of 2021 (+o.1 percent). This was no surprise. In my April forecast, I had expected economic stagnation in the first quarter. While private investment increased at a solid rate in the first three months of 2021 (+3.7 percent), private consumption decreased by 1.2 percent. Export growth was modest at 0.5 percent, while imports expanded more strongly (+2.3 percent).

Since the start of the pandemic, my main worries have not been related to the short-term, but to developments in the medium- and long-term. There will probably be a solid recovery over the summer. The rebound will be supported by a moderate increase in tourism exports. Currently, one can expect that a significant number of tourists will be allowed to visit the country, although the numbers seen before the pandemic will obviously not (yet) been achieved. In the fall and winter, the economic recovery will continue, but slow down.

Expansionary fiscal and monetary policies will support the gradual recovery of the economy and the labor market. But the situation will continue to be difficult for a considerable number of people. Monetary policy of the European Central Bank will continue to be expansionary. In addition, Italy will receive financial support from the recovery fund of the European Union (probably more than 200 billion euros). Many effects of these public expenditures will be relevant for the medium term, but there might also be some smaller short-run impacts. These funds are planned to be used, among others, for infrastructure projects such as high-speed trains, “green” energy, and projects surrounding the “digital economy”. One may expect that the recovery fund will lift the gross domestic product of Italy by around 4 percent in the coming years. In the years to come, the further accumulation of public debt might be a burden and the government should aim at gradually achieving a balanced budget to bring the debt-to-GDP ratio down again in the medium term. The new prime minister, Mario Draghi (the former ECB president), is trying to implement sensible measures to reform the Italian economy. One should not expect miracles, but I am cautiously optimistic for the Italian economy. It has a lot of potential such as a lot of productive small and medium-sized firms and skilled people.

After the economic stagnation in the first quarter of 2021, I expect a solid growth rate in the rest of the year. For the whole year 2021, my current forecast is 4.5 percent. The recovery will be even somewhat stronger in 2022 with a growth rate of 5.3 percent. Thus, I am slightly more optimistic than in my April forecast. Inflation will gradually increase towards two percent (the target of the ECB). The situation on the labor market will also gradually improve, but remain difficult for a considerable number of people. For the medium-term, I am cautiously optimistic that the Italian economy will be able to deliver higher productivity and growth rates than in the past decades. Forza Italia!

Do you want to contact me? Email: info@eagle-economist.com

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How-to Guide: Becoming a Digital Nomad

Have you ever thought about pulling up your roots and setting sail on your own adventure? Do you want to find a way to prioritize experiences and relationships over material things and owning land or a house that would just cement you in one location? This guest post by Lance Cody-Valdez (the creator of free-lance-now.com) shares some things to think about before you turn the world into your office.

Digital nomads live these kinds of lives. They use online work and technologies to earn an income while traveling, sightseeing, and spending time with the ones they love the most, instead of being chained to one desk or one city. There is plenty of research to suggest that this kind of lifestyle improves creativity. These creative people don’t want to be saddled with the burden of the traditional office environment, instead opting for the open road.

How do you make money?

The life of the digital nomad may not require a mortgage, but you still need to fund travel, computer costs, internet expenses, and sustenance. There are countless ways for digital nomads to make money, including publishing an eBook and marketing it online (creating a passive income stream for you) and joining sites like Fiverr to do odd jobs for people in need.

Another interesting way to make money would be to start your own freelance business. Depending on your skillset, you can set up a freelance practice to do myriad things, like blogging, tax preparation, editing, or offering resume writing services. It’s easy to create a profile on an online job board, where potential clients can read reviews, weigh your average delivery time, and determine the cost before hiring you.

How do you find the right working spot?

When you’re living the nomadic lifestyle, you don’t have one specific work location, but you still need access to the internet to do your work. So, where do you go? Coffee shops, libraries, and even bars offer internet access. Choose a place where you know you will be comfortable enough to get your work done, and then close your laptop and explore!

One option would be to find a coworking space. This is essentially a place you can go to work “with” people — or, in other words, in the same physical space as others, even though you are doing different work or working for different companies. These places offer a comfortable environment to put in a few hours of work and allow folks to share ideas, community, conversation, and costs.

How do you afford it?

Speaking of costs, it’s probably one of the biggest questions about embracing the digital nomad lifestyle: How do you afford to pack your bags, move away, and keep moving? The first step toward saving up for this kind of lifestyle is to determine how much you’re spending now — and how much you can cut. Once you ditch the mortgage or rent payment and hit the road, that will be one big expense you can do away with — but you should also take a look at your discretionary spending and start putting more money toward your future.

When it comes time to start traveling, don’t discount the usefulness of travel websites that can get you good deals on lodging. Stay in hostels or book a stay at an Airbnb. You should also learn how to cook, as homemade meals are much less expensive (as well as more nutritious!)

As a digital nomad, you’ll be able to earn an income from any location you choose. Instead of working in a traditional office, put these tips into practice today!

Lance Cody-Valdez is the creator of free-lance-now.com, which helps others to use freelancing to escape the 9 to 5 daily grind. Lance worked in corporate marketing before, but decided to quit his job the following day and used his meager savings to stay afloat as he built a career as a freelance writer and content marketer.

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Email: info@eagle-economist.com

Japan: Economic recovery strengthens somewhat but remains subdued

In Japan, economic output slightly expanded in the second quarter of 2021. The pandemic and measures to contain it continued to dampen economic activity. All in all, I expect that the Japanese economy will grow only moderately (when compared to other countries) in the current year mainly due to the slump in economic output in the first quarter and a relatively subdued recovery. Gross domestic product will – according to my forecast – increase by 2.4 percent in the current year. In 2022, I expect a growth rate of 2.8 percent.

In Japan, gross domestic product increased slightly by 0.3 percent in the second quarter of 2021 compared with the previous quarter, after the economy had still contracted by 0.9 percent in the first three months of the year in the face of widespread pandemic containment measures. The Japanese economy has thus returned to a subdued growth path. Private investment in particular developed strongly in the second quarter, but household consumption expenditure also increased at a solid rate. The marked growth in domestic demand led to significantly higher imports, which increased more strongly than exports, which also rose.

Growth is expected to accelerate only slightly in the second half of the year. The spread of the delta mutation is still dampening further economic development in Japan to a slightly greater extent than in other developed economies – partly because, due to a delayed start to the vaccination program, the vaccination rate is still lower than in other developed economies. In July and August, corona case rates and intensive care unit occupancy rose significantly after a decline in the spring. Containment measures were tightened again in some regions – including the Tokyo capital region. In particular, people were urged to stay at home and switch to home-based work if possible. Business sentiment and consumer confidence had improved somewhat in early summer, but are now expected to deteriorate again somewhat in late summer and fall. Economic development continues to be supported by noticeable growth in foreign demand, although export growth rates are likely to be somewhat lower than in the first half of 2021 due to problems with international supply chains and the global spread of the delta mutation. The Olympic Games at the end of July and beginning of August are unlikely to have provided any noticeable economic impetus; due to the pandemic, hardly any foreign visitors arrived. Uncertainties exist with regard to the outcome of the Japanese parliamentary elections, which must be held by November. The popularity of Japanese Prime Minister Suga has worsened, in particular because of the pandemic management, which many people perceive as inadequate. However, fundamental changes in economic policy are not to be expected regardless of the election outcome.

Expansionary fiscal and monetary policy will continue to support the moderate recovery process of the Japanese economy. Financing conditions for companies will remain favorable and stimulate investment. Further impetus for corporate investment will also come from the fiscal stimulus package adopted last year, which includes measures in the area of digitization and the promotion of “green” energy sources.

Not only the additional fiscal policy measures but also the good situation on the labor market are likely to support household incomes. Despite the economic slump, the official unemployment rate has increased only slightly since the outbreak of the pandemic; in June 2021, the unemployment rate was only 2.9 percent, after having increased in the meantime from 2.2 in December 2019 to 3.1 percent in October 2020; above all, the government’s short-time work program and the reluctance of Japanese companies to lay off workers have probably prevented a stronger increase in unemployment.

Advances in the vaccination campaign and economic policy stimulus keep the Japanese economy on a moderate recovery path despite the dampening effect of the delta mutation and problems with international supply chains. Gross domestic product is likely to grow by 2.4 percent in the current year. In 2022 and 2023, growth rates are likely to be 2.8 and 1.9 percent.

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What caught my eye: Inflation and the Fed, the failure of national-building in Afghanistan, and why it is a bad idea to make bitcoin compulsory tender

Remarks of Federal Reserve Chairman Jerome Powell at Jackson Hole Economic Policy Symposium. Listen carefully!

https://www.youtube.com/user/KansasCityFed

Is it a “Bad Idea to Make Bitcoin Compulsory Tender”?

https://www.cato.org/multimedia/media-highlights-radio/george-selgin-participates-debate-its-bad-idea-make-bitcoin

“Why Nation-Building Failed in Afghanistan” by Daron Acemoglu:

https://www.project-syndicate.org/commentary/afghanistan-top-down-state-building-failed-again-by-daron-acemoglu-2021-08

“Why the Bezzle Matters to the Economy” by Michael Pettis:

https://carnegieendowment.org/chinafinancialmarkets/85179

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Quote of the week – Leo Tolstoy

“All happy families are alike; each unhappy family is unhappy in its own way.”

Leo Tolstoy

The last quotes were from Janet Yellen, Niccolò Machiavelli, Joseph Schumpeter, Piero Sraffa, Winston Churchill, Christina Romer, Esther Duflo, Peter Drucker, Frank Knight, Joan Robinson, Robert Mundell, Alfred Marschall, Janet Yellen, Ludwig von Mises, Thorstein Veblen, Deirdre N. McCloskey, Paul Samuelson, Elinor Ostrom, Robert Solow, Joan Robinson, and Friedrich A. Hayek.

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U.S. economy: The recovery continues, but the pandemic is not over yet

The U.S. economy grew significantly by 1.6 percent in the second quarter of the current year compared with the previous quarter (annualized 6.5 percent). The economic recovery after the pandemic-related slump in the first half of 2020 thus continued; gross domestic product had already increased by 1.5 percent (annualized 6.3 percent) in the first quarter. In the meantime, economic output has returned to the level of the final quarter of 2019 before the pandemic. Private consumption in particular increased significantly in the second quarter, but business investment activity was also strong. New Corona infections declined steadily through the end of June and the vaccination program progressed well by international standards. In the wake of these developments, infection control measures were gradually relaxed in the states. This benefited personal services in particular, which grew at strong rates. However, industrial production also increased noticeably.

In the third quarter, the economy is expected to grow at a similar rate to the first half of the year. Industrial production and retail sales increased markedly in July. The purchasing managers’ indices were also still well above the expansion threshold of 50 index points in July, but do not indicate any further acceleration in economic growth. Consumer sentiment – as measured by the indices of the Conference Board and the University of Michigan – was also still optimistic.

However, the pandemic is not over yet. In the second half of the year, the economy in the United States is likely to continue to grow with momentum, but growth rates will probably be somewhat lower in the fall and winter than in the first half of the year. Corona case numbers have risen significantly again since July in several states against the backdrop of the delta mutation now dominating. In addition, progress in the vaccination program has slowed down due to vaccination skepticism in some regions. As of mid-August, the rate of fully vaccinated persons in the United States is slightly more than 50 percent; however, vaccination rates are sometimes much higher among at-risk groups and in metropolitan areas. Although strict containment measures are unlikely, as they were last winter, the economic recovery is nevertheless being somewhat dampened by the spread of the delta variant.

The fiscal packages adopted in December and March – amounting to around 13 percent of GDP – are still having a stimulating effect, and boosting private consumption and demand for residential property in particular. However, the stimulating effect is likely to gradually diminish in the coming quarters.  But consumer demand will still be the main growth driver of the US economy in the coming quarters. In 2022 and 2023, growth in private consumer spending will weaken further but still increase at solid rates. Against this background, business investment will also increase noticeably. Although corporate financing conditions are likely to become less favorable than recently, but will continue to support companies’ propensity to invest.

The dynamic recovery of the US economy has also continuously improved the situation on the labor market. The unemployment rate was only 5.4 percent in July, down from 6.7 percent last December and as high as 14.7 percent in April 2020. However, many people have withdrawn from the labor market, at least temporarily; the labor force participation rate in August was 1.6 percentage points lower than before the pandemic in February 2020, so the official unemployment rate might underestimate the true extent of unemployment by roughly 1 ½ percentage points.  The labor market situation will continue to improve. In 2022 and 2023, however, the decline in the unemployment rate is likely to be much smaller than recently.

Monetary policy will remain expansionary – partly because the central bank’s revised monetary policy strategy in August 2020 will allow inflation to overshoot moderately above the average target of two percent. This year, inflation is likely to temporarily overshoot this target by a significant margin. However, much of the higher inflation is due to temporary factors such as higher oil prices compared with 2020, as well as supply bottlenecks and associated price increases for various goods – such as semiconductors and raw materials. For example, a shortage of semiconductors has caused production delays in car manufacturing, which led to exceedingly sharp price increases in the market for used cars in the spring of 2021. The index of personal consumption expenditures published by the Bureau of Economic Analysis, which the U.S. Federal Reserve primarily uses for its monetary policy decisions, is expected to increase by nearly four percent this year. The consumer price index published by the Bureau of Labor Statistics is also expected to rise temporarily to somewhat more than four percent on average for the year 2021. As the temporary influences on prices gradually fade, the inflation rate will also gradually decline. However, in view of continued dynamic domestic demand for the time being, inflation is likely to remain above two percent in 2022 and not return to below two percent until 2023.

In view of the favorable economic recovery and somewhat higher inflation, it is to be expected that the U.S. Federal Reserve will gradually begin to make its monetary policy less expansionary at the end of the current year. This will probably initially involve a gradual reduction in monthly securities purchases, which currently amount to $120 billion. The first interest rate increases may then be expected towards the end of 2022. All in all, the US economy will probably grow by 6.3 percent in the current year. In 2022 and 2023, growth rates are likely to be 3.9 and 2.1 percent respectively. 

Email: info@eagle-economist.com

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What caught my eye: Climate change and international trade, instant cross-border payments, regulating big techs in finance, and much more…

“Tackling climate change with a carbon border adjustment mechanism”, an interesting trade talks episode with Soumaya Keynes, Chad Bown, and Susanne Dröge:

“Nexus: a blueprint for instant cross-border payments” (BIS):

https://www.bis.org/about/bisih/topics/fmis/nexus.htm

“Fed Vice Chair Richard H. Clarida on US economic outlook and monetary policy”:

https://www.piie.com/events/fed-vice-chair-richard-h-clarida-us-economic-outlook-and-monetary-policy

“Regulating big techs in finance” by Agustín Carstens, Stijn Claessens, Fernando Restoy and Hyun Song Shin:

https://www.bis.org/publ/bisbull45.htm

“A stylised quantitative assessment of Next Generation EU investment” by Géraldine Mahieu, Philipp Pfeiffer, Janos Varga, Jan in ‘t Veld:

https://voxeu.org/article/stylised-quantitative-assessment-next-generation-eu-investment

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Some of my blog posts and economic forecasts are first reserved to my paying subscribers. After two weeks, all articles are publicly available. If you would like to get instantaneous access, you can subscribe for 5 US dollars per month (or the equivalent amount in your currency). You can unsubscribe at any time:

Email: info@eagle-economist.com

Quote of the week – Janet Yellen

“Listening to others, especially those with whom we disagree, tests our own ideas and beliefs. It forces us to recognize, with humility, that we don’t have a monopoly on the truth.”

Janet Yellen

The last quotes were from Niccolò Machiavelli, Joseph Schumpeter, Piero Sraffa, Winston Churchill, Christina Romer, Esther Duflo, Peter Drucker, Frank Knight, Joan Robinson, Robert Mundell, Alfred Marschall, Janet Yellen, Ludwig von Mises, Thorstein Veblen, Deirdre N. McCloskey, Paul Samuelson, Elinor Ostrom, Robert Solow, Joan Robinson, and Friedrich A. Hayek.

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Some of my blog posts and economic forecasts are first reserved to my paying subscribers. After two weeks, all articles are publicly available. If you would like to get instantaneous access or to support me, you can subscribe for 5 US dollars per month (or the equivalent amount in your currency). You can unsubscribe at any time:

Email: info@eagle-economist.com