Careful With the Slowdown

August 23, 2021 Updated: August 24, 2021

Commentary

Recent macroeconomic data from the United States should worry us. Amid the reopening and the biggest fiscal and monetary stimulus in recent history, and with all the possible tailwinds from policy decisions, consumer confidence has plummeted to the lowest level since 2016.

Retail sales have fallen sharply again in July, and the employment or industrial production data are far more than disappointing, considering the level of stimulus and that gross domestic product (GDP) has returned to pre-pandemic levels.

The use of industrial capacity, at 76 percent, is 4 percent below the average for the 1972 to 2020 period, and the labor force participation rate, at 61.7 percent, has been stagnant for 12 months and at mid-1970s levels.

The total savings rate as a percentage of disposable income has almost vanished, to 9.4 percent in June 2021—almost back to pre-pandemic levels—from 33.8 percent in April 2020.

Let’s put it in the context of a reopening that has been in place for more than a year, a fiscal stimulus equivalent to $3 trillion, and a monetary stimulus of $1.7 trillion in 2021. The United States would go into a severe recession if it weren’t “doping” the economy.

We can’t ignore the slowdown in China, where even the official data reflects a slowdown in the expansion process. If we take the typical difference between official and real data, we’ll see that, for example, gross capital formation has slowed rapidly in 2021.

This is important because the entire recovery of the eurozone relies on fiscal and monetary impulse in addition to the European Recovery Fund.

The recovery of the euro area is keeping some positive momentum simply because it’s more delayed. The GDP of the eurozone is still 3 percent below pre-pandemic levels, and employment is well below the levels of comparable economies, considering that we must add the workers in furloughed jobs that are still above 6 million while unemployment, at 7.1 percent estimated for August, is recovering slowly.

This data reinforces my view that central banks will maintain their ultra-expansionary policy with very modest changes. Tapering will likely be more cosmetic than real, and rates will remain low while, in the case of the euro area, negative. The fact that the Federal Reserve balance sheet has expanded further, while officials talked about tapering, reinforces this view.

The threat of an escalation of international tension after the Taliban coup in Afghanistan is added to the impact of the Delta variant of the CCP virus, which will be more evident in winter, as happened in 2020.

The important thing is to understand that, from the investor point of view, we have probably passed the peak of recovery and the most cyclical sectors are already discounting the slowing momentum.

The unsustainable fiscal situation of developed countries makes a serious normalization of policy impossible. The European Central Bank is the only buyer of Italian and Spanish debt, according to the Institute of International Finance, and this disguises an imminent risk but doesn’t eliminate it.

Inflation, the great threat to the recovery, remains high, and although some components have moderated, the most important factors for the average consumer, non-replicable goods, remain well above the levels of 2015.

Central banks are faced with a devil’s choice created by their own policy: Either let inflation run and create a stagflation problem, or scare the markets by reducing purchases. They will choose the first, without a doubt.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

Daniel Lacalle
Daniel Lacalle
Daniel Lacalle, Ph.D., is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.”