“The success of either containment or vaccination programs has determined the speed of the economic recovery. While China was able to keep the virus contained, other countries had to impose varying degrees of restrictions. Vaccination campaigns have now shown their worth in the US, UK and the EU, although initial progress varied. This has been followed by gradual lifting of restrictions and an economic recovery after the deep recession last year.

‘We expect that the economic recovery will continue into the second half of 2021, supported by a further reopening of economies and increased normalization of economic activity. We also believe the virus situation will continue to improve in the coming months, which should broaden the recovery further. Data suggests most economies have performed better during the pandemic than initially thought and government support programs seem to have been effective in preventing a deeper recession We also think it is likely that the monetary and fiscal policy tailwinds will continue in coming quarters as governments will want to make sure the recovery is complete.

The combination of propped up demand, further normalization and supportive policies will result in a quick recovery. This means that in terms of GDP the damage done can be regained relatively quickly - this year in the US and probably early next year in Europe. This doesn't mean the pandemic didn't have an economic cost; it will leave more lasting scars in the form of a sharp rise in government and corporate debt levels, low interest rates and large budget deficits.

The pandemic is still far from over as we see slow vaccination programs in some other parts of the world but it is comforting that so far all the vaccines have proven to be equally effective with new variants. However we are mindful, that the autumn and winter period in the Northern hemisphere could again lead to higher transmission rates and a reintroduction of restrictive measures in some countries.”

Fiscal support and bottlenecks

“As mentioned, fiscal support is a tailwind for economic growth in the short term. In the past year, governments all over the world provided unprecedented emergency support to the economy, for example via income support. Although some of these benefits are running off, the fiscal impulse remains supportive in the near term. In the US, the recently announced American Rescue plan has boosted growth while in Europe, the economic benefits of the Recovery plan are starting to materialize. The fiscal support will result in large budget deficits in 2021 and increased government debt levels.

There are several factors which could result in temporary bottlenecks and potentially dent the economic momentum in the coming months. For example the virus has resulted in supply chain disruptions as demand for goods increased during the pandemic, while many companies initially expected demand to fall, leading to temporary shortages. At the same time, there could be dislocations in the labor markets as unemployment benefits are still high and schools are sometimes still closed, both preventing employees to fully return to their jobs.”

Inflation dynamics are strong but not structural

“The current inflation dynamics are strong, pushing inflation up to levels we have not experienced in a long time. We expect inflation to remain elevated during the coming months on the back of a cyclical upswing around the reopening of the economy. Commodity prices have risen and temporary supply bottlenecks result in higher prices of anything from semi-conductors to building materials.

Going into 2022, we expect inflation to fall back as activity normalizes and bottlenecks are resolved. We believe that structural disinflationary forces will prevent a sustained higher level of inflation. Technological progress, the lack of bargaining power of labor and aging population will again start to exhibit downward pressure on inflation.”