After a historically massive decline in activity in the second quarter, the global economy appears to be recovering in a similarly dramatic fashion this quarter. The political and monetary authorities’ huge support programmes have led to a V-shaped rebound in household consumption, with retail sales in some countries even returning to precrisis levels.
This is particularly true in the United States and the eurozone, where stimulus measures such as sending cheques to people in America and short-time work schemes in Europe have fulfilled their role as economic stabilisers. On the other hand, industrial production, which has been affected by the somewhat subdued recovery in orders for capital goods, is still faltering. In China, the economic recovery is being driven more by the manufacturing sector due to a government-led acceleration of infrastructure spending. Services activities there have not yet returned to pre-crisis levels. In Japan, the economic recovery appears to be slower, as growth is more dependent on an improvement in exports and demand for capital goods.
In the United States, inflation seems to be normalising after a period of depressed prices following the economic recession. Headline inflation increased from 0.6% to 1% in July; excluding energy and food, inflation rose from 1.2% to 1.6%. The Federal Reserve’s preferred inflation indicator, the PCE (personal consumption expenditures) deflator excluding energy and food, rose from 1.1% to 1.3%. In the eurozone, however, price weakness continued, with headline inflation even turning negative (from 0.4% in July to -0.2% in August) and inflation excluding energy and food falling from 1.2% to 0.4%.
At the annual symposium held by the Federal Reserve Bank of Kansas City at the end of August, the Chair of the US Federal Reserve, Jerome Powell, unveiled a change in its monetary policy goals following a review of its longer-term strategy. Instead of aiming for a maximum inflation rate of 2%, the Fed is now targeting inflation of 2% on average over time, if necessary by letting prices rise for ‘some time’ to compensate for periods of belowtarget inflation. Moreover, the monetary authorities also say they will be more tolerant of extremely low unemployment rates as long as the resulting wage pressures do not lead to an outbreak of inflation. This change in strategy suggests that negative real interest rates will persist for some time. In Europe, the ECB’s monetary policy strategy review that was launched in January is expected to be completed by the end of the year.
The stronger-than-expected economic recovery has led to a slight increase in government bond yields on both sides of the Atlantic. In the United States, the yield on the 10-year Treasury note rose from 0.53% to 0.70% over the month. In the eurozone, the benchmark 10-year government bond yield rose from -0.53% to -0.40% in Germany, from -0.19% to -0.10% in France, from 1.01% to 1.09% in Italy, and from 0.34% to 0.41% in Spain.
Equity markets posted their best August for more than 30 years. The MSCI All Country World Index Net Total Return expressed in euros was up 4.9% over the month. Led by the giants of the technology sector, the US stock market performed particularly strongly, with the S&P 500 index clearing 3,500 points at the end of August, another all-time high. Over the month, the S&P 500 in the United States, the Stoxx 600 in Europe, the Topix in Japan and the MSCI Emerging Markets gained 7.0% (in USD), 2.9% (in EUR), 8.2% (in JPY) and 2.1% (in USD) respectively. Despite most equity market indices rebounding significantly since the collapse in March, behaviour within the markets has proved very disparate, with the rise being increasingly limited to a small number of so-called growth stocks whose valuation levels have in some cases become absurd or at least hard to justify.
The dollar continues to be weak. After falling strongly in July, it depreciated a little further in August, with the euro/dollar exchange rate rising from 1.18 to 1.19 over the month. The US Federal Reserve's announcement that in future it will tolerate temporary increases in inflation rates above 2% could weigh on the level of the world's leading reserve currency for some time to come. After breaching the $2,000 barrier in the first half of August, gold entered a consolidation phase, ending the month at $1,968 compared to $1,976 at the end of July. Silver continued its upward trend, with the price per ounce rising from $24.4 to $28.1, a rise of 15%.