Last week the Federal Reserve Beige book for the month of August provided a good set of clues to interpret the recent relative weakness in macroeconomic data. The message was pretty clear and unequivocal: where activity is declining or slowing, it is mostly due to COVID-19 resurgence, supply disruptions or labour shortages, as opposed to demand softening. Further, businesses remain optimistic on near-term prospects.
The National Retail Federation echoed the message stating that moderation is in large part due to tougher comparisons and port closures/supply chain disruptions as opposed to a deceleration in demand. Finally, the Bank of America total credit card spending gauge on a 3-week moving average (to smooth Labor Day calendar effects) is running at +12.8% year-on-year (yoy) above 2020 and 16.2% above 2019, which remains a robust pace.
On the other side of the equation, August export data for China and Taiwan both surprised on the upside, especially in light of the Delta variant and port closures. China’s exports came in at +25.6% yoy vs. expectations of +17.3% yoy, while Taiwan beat by 3.5 percentage points at +26.5% yoy. It is therefore not entirely surprising that the world composite index for shipping costs of containers has recorded another new high, up 1% wow and for the first time in excess of $10,000. We additionally noted last week, via our satellite monitoring of ports congestion, that the LA port is reaching new unseen levels of congestion and backlog. To make matters worse, climate continues to create havoc in South East Asia where Typhoon Chanthu (Cat5 Atlantic Strength and the strongest this year) is disrupting port operations in Taiwan and China, while Vietnam is getting hit by twin tropical storms.
The bottom line is that it will take a while longer before the system can get over the rolling disruptions of COVID and weather volatility. But there is an additional consideration. It is important to keep in mind that the big government-sponsored infrastructure projects have not even started yet. Many aspects of these projects are likely to rely heavily on long trade routes mainly from Asia to Europe or the U.S., as well as large quantities of labour. The Bipartisan Infrastructure Deal has not even been voted on yet (it is expected for late September, with potentially more in the second infrastructure package) and in Europe things are about to accelerate radically in the quarters ahead. Indeed, 73% of the Euro 750 billion EU Recovery Funds have now been claimed by member States, and 61% have been given the green light by the EU Commission, but a mere 13% had actually been paid out by end August. The majority of these funds (57% minimum) have to be directed to Climate and Digital and defacto Green Mobility is the biggest winner. As the reopening boom ebbs, we are likely to see other factors supporting demand, such as inventory rebuilding, delayed capital expenditure by corporations that were mostly in crisis management mode, and large infrastructure projects from Europe, the U.S., China and later, Japan as the election campaign is full of fiscal promises. Looking ahead, the International Energy Agency estimates that achieving the net zero emissions goals will require an extra $2.5 trillion of investments per annum globally, which represents a doubling of gross capital formation and a substantial impact on world GDP for years to come.
This boost to demand will persist for some time, and we feel that tapering by central banks is not enough to derail these strong cyclical tailwinds. There are disruptions, shortages and sand in the wheels, but the cycle ahead feels long and likely to remain supported by central banks, not least because after the pandemic emergency, the world is facing a climate emergency.