The virus resurgence during the winter months has weakened the pace of the economic recovery, and will condition the economic data for the first quarter of 2021. However, a successful vaccine roll-out and ongoing accommodative monetary and fiscal policies are expected to lead to a roll back of economic restrictions and an eventual boost in consumer spending and growth in the second half of the year.

Monthly Purchasing Manager Indices (PMI) readings, released last week, act as key leading indicator and shine light on the current effect of economic restrictions. The key takeaway from last week’s reading was that the sharp expansion in the US highly contrasts with the steepening decline in Europe. The Flash Eurozone PMI Composite stood at a two-month low, at 47.5 which represented the three months of consecutive declines. The clear drag is the services sector, which suffered from tighter covid-19 containment measures. The manufacturing sector, albeit still in expansion mode at 54.7, was negatively impacted by weaker demand growth and supply constraints that are limiting production.

On the other hand, the January PMI data for the US represented a sharp expansion in business activity at the start of 2021. Composite PMI reading stood at 58, with both Services and Manufacturing indices recording an expansion of 57.5 and 59.1, respectively. The data reflects growth across new business and export orders while supplier delays and shortages pushed input prices up, and therefore, input cost inflation higher.

As duly noted by ECB President Lagarde in last week’s ECB meeting, the virus resurgence and the new variants emerging in UK, South Africa and Brazil, have triggered tighter lockdowns across major countries. This has weighed down the economic recovery during the fourth quarter of last year and is likely to negatively impact the first quarter of 2021. Albeit the muted short-term outlook, both the ECB’s economic forecasts and monetary policy remain unchanged, with risks tilted to the downside described as “less pronounced”. Key positive developments are of course the roll-out of vaccines, but also the Brexit agreement for EU and UK trade relations.

More importantly, the ECB meeting placed clear emphasis on the need to continue to provide favourable financing conditions as a means to prevent the downward impact of the pandemic on the inflation outlook. In addition, ECB President Lagarde sustained the view that fiscal action continues to be required, both at national and European level, particularly mentioning that fiscal support should be targeted and temporary.

Despite that economic numbers in the US stand relatively better than Europe, the importance of combined monetary and fiscal tools to counteract the economic impact of the pandemic, resonates highly across the Atlantic. Since the last FOMC meeting, the spread of covid-19 in the US has continued to worsen but fiscal stimulus expectations have also shot up on the back of President’s Biden $1.9 trillion covid-19 relief package. Former Chair of the US Federal Reserve, Janet Yellen who is now the nominee for Treasury secretary, fully supports further fiscal aid, stating that “with interest rates at historic lows, the smartest thing we can do is act big”. Given the relatively resilient economic data and the prospects for further fiscal stimulus, this week’s FOMC meeting is also unlikely to bring any changes to the policy or outlook.

Having said that, while acknowledging the virus resurgence and the consequent slowdown in economic activity, monetary authorities and markets continue to look ahead, and to focus on the positive prospect of mass vaccination. The successive roll out of vaccines together with pent up consumer demand, are the key drivers that support the medium-term outlook and boost growth expectations for the second half of the year.


This article was written by Rachel Meilak, CFA, Equity Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd which is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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