Europe and Asia: Convergence in Growth-Inflation Dynamics

UK has delayed the withdrawal of the final phase of easing of restrictions on account of the pandemic raising its head again. The May inflation rose to 2.10 % as against the Bank of England’s threshold of 2 % creating talks of policy modifications by the Old Lady of the Threadneedle Street. But the Bank is of the view that growth and inflation have come together, and it may not be a wise thing to “overreact” to inflation numbers. They feel that inflation is the result of the post-pandemic rise in economic activity and it may not last long. In the Governor’s own words, “It is important not to over-react to temporarily strong growth and inflation, to ensure that the recovery is not undermined by a premature tightening in monetary conditions.”

June inflation in Germany was a shade lower than it was in May, 2.30% in June lower from 2.50 % in May. This easing is considered a temporary fall due to certain weather conditions, and later in summer the inflation rate may touch 3 % or higher as per some estimates. Demand for household goods and services has registered the highest rise in prices. The gradual reopening of several sectors of the economy, the supply chain disruptions, high commodity prices have all been the drivers of the rise in prices, and also of pressure on the price level in future. France witnessed the highest consumer confidence level since 2007, the index for June is at 102, higher than the long- term average of 100, indicating that consumers consider the present time as best suited for purchases. Italy is no different.

The manufacturing confidence is at its highest levels since the year 2000. Larger orderbooks, falling inventories, stable employment scenario have infused greater confidence in the recovery story, and analysts expect higher than estimated GDP growth, if the delta strain does not cause much widespread distress. Italy Consumer Confidence is at the highest level since 2018, signifying an overall pick up in economy. The expected inflationary pressures may force the European Central Bank to rethink on Emergency Asset Purchase Programme. While they may not stop this altogether, a changeover to more traditional money market operations including repos may be adopted as early as the first quarter of 2022.

China, in contrast presents a slightly hazy scenario. In the month of June manufacturing PMI was 50.90 compared to 51.00 in May. The services PMI too was lower. The services index was down to 52.30 in June compared to 54.30 in May. This is considered a temporary fall as the business performance is affected by fears locally of the spread of the pandemic with fresh outbreaks, and equally, the lockdowns in many countries with whom China has fairly large trade and commerce.

The June Tankan report in Japan paints a near gloomy picture of the economy. The pick-up in economic growth after the pandemic induced shutdown came to an end seems to be fading out. Major part of the gains came from a favourable base effect. The contraction seen in 2020 was of the order of 4.70 %, and the rate of economic growth is likely to be around 2.20 % for the full year. The lockdown on account of the second wave of the pandemic and the slow pace of vaccinations have proved to be a dampener for the economy.


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