Which is the worst inflation or unemployment

Inflation remains the dominant market theme

In Switzerland, real GDP in the third quarter should already reach the level of before the pandemic. In the USA, the consumption engine is booming thanks to excess household savings. And in the euro zone, the focus is on Italy's investment plans. According to Swiss Life Asset Managers, the predominant market theme remains the strong but temporary rise in inflation rates.

The opening steps that have taken place since March ensure a further acceleration of the domestic economic dynamic. The positive economic data have been increasing recently: The unemployment rate on the labor market seems to have exceeded its highest level of 3.5% in January. "Up to now we had expected this turning point for April. We have also revised our estimate of the average unemployment rate for 2021 from 3.6% to now 3.2%", write the economists at Swiss Life Asset Managers in their latest economic outlook. The fact that the crisis is likely to cost fewer jobs than originally feared coincides with observations in other European countries and goes back to the massive fiscal policy reaction.

In the opinion of the economists, however, there remain unanswered questions: It is not yet clear how well the labor market will accept apprenticeship and university graduates or whether the end of the measures in the area of ​​short-time work will lead to an increase in unemployment. The experts continue to assume that the real gross domestic product in Switzerland will already reach the level of the final quarter of 2019 in the third quarter. In addition to the astonishing resilience of large parts of the domestic service industry, the manufacturing sector benefits from strong demand from abroad. As elsewhere in Europe, the purchasing managers' index for industry is close to historic highs. This picture fits that exports to China reached a new record in March.

The risk of rising inflation is also a market issue in Switzerland. In the first quarter, according to Google, the search volume for the term "inflation" soared to its highest value since 2011. "The inflation rate will actually rise to 1.0% by December 2021. However, we are assuming a temporary development, mainly fueled by the rise in energy prices and through pent-up demand, "say the economists at Swiss Life AM.

Comparison of forecasts

USA: The driving force of the world economy

The US will be the driving force behind the global economy in 2021. While growth in China is being braked politically and Europe's economy is groaning under the ongoing containment measures, the USA has recorded consistently robust growth figures since the slump in the first half of 2020. According to the experts, the pre-crisis level of GDP is likely to be exceeded in the current quarter. Rapid vaccination advances and a series of economic stimulus packages ensure this.

The retail sales seem to depend on the drip of the "stimulus checks" to the US households - their increased shipments in January and March 2021 ensured growth rates of 8% and 10% respectively. However, the economic research team at Swiss Life AM sees the risk of a flash in the pan as low. The monthly savings rate has averaged 17.5% of disposable income since March 2020. Compared with the savings rate for the years 2018–2019 averaging only 7.7%, US households have accumulated 1.9 trillion since the start of the pandemic. USD (8.9% of GDP) amassed in "excess" savings. Even if these savings were distributed unevenly and were partly used for debt reduction or investments, it was still a well-known "ammunition" to keep private consumption going in the next few months. However, after the openings, the weight should move away from retail to consumer sectors such as travel, leisure or health.

Rising energy prices had an even greater impact than expected in March, particularly through higher prices for transport services. In combination with a clear base effect - in the previous year, prices collapsed massively in March - the inflation rate rose from 1.7% in February to 2.6% in March. "We expect a further increase to well over 3% in the second quarter before an easing occurs," said the economists.

Eurozone: Investors focus on Italy

Almost twelve months after the reconstruction fund was agreed, which was the most important measure alongside monetary policy support and short-time working programs in the individual participating countries, it can be said that the worst fears for Europe's southern periphery have not materialized. Unemployment has not risen to the same extent as it did after 2008, nor did the risk premium on Italian or Spanish government bonds widen again significantly.

Nevertheless, investors are still focusing on Italy these days. Its government under Mario Draghi has now presented the investment plan for around 200 billion euros in reconstruction aid. The funds available make up around 11% of the nominal gross domestic product in 2021 and are to be distributed over five years, primarily to projects to improve medical care, rail infrastructure and digitization. In addition, ecological renovation projects in the construction sector are funded. Spain is also preparing similar programs. Compared with the recent past, these states will be able to increase their investment spending by around a third in the coming years.

As the economists continue, the rise in inflation rates continued in the second quarter. Meanwhile, the annual rate of inflation in four member states of the monetary union is 1.8% or higher and thus close to or above the target value aimed at by the ECB. For the euro zone as a whole, they expect the inflation rate to rise to 1.8% by the fourth quarter.

China: slacking momentum

China's economy grew 18.3% in the first quarter. However, according to the experts, this record value is only of limited use as it represents a comparison with the very low base of last year, when the country went into a nationwide lockdown at the height of the pandemic outbreak. Quarter-on-quarter growth, however, suggests slowing momentum.

The sequential slowdown was driven by two main factors: mobility restrictions during the Chinese New Year celebrations in February to contain a resurgence of the virus, and a normalization of fiscal and monetary policies, which weighed on investment. The economic research team assumes that Chinese growth should regain momentum over the next few quarters. Improved labor market conditions, excess savings and less uncertainty about the pandemic should drive consumption in the coming months. Retail sales in March have already increased significantly and exceeded consensus expectations. At the same time, the global economic recovery will support Chinese exports. "Investments - the main growth drivers in 2020 - will, however, continue to weaken as the Chinese government is focusing on containing financial risks and restricting lending, especially for the highly indebted real estate sector," said Swiss Life AM economists.

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