ING’s July Economic Update: Taking stock at half-time

Like so many Europeans, I have spent the last few weeks watching too many football matches and trying to convince myself (and my wife) that there is a higher meaning to it all and it's not just a big waste of time. As a German, I'm not entirely sure about the latter but maybe I'm onto something with 'soccernomics'. The analogies between economics, politics, and football are certainly striking.

The French team surprised us by showing that even designated champions can stumble and fall, completely unexpectedly. The German team showed that a single spectacular rebound cannot make up for a lack of structural reform, innovation and new investment, while the Danish team proved how team spirit and close cooperation after a literal existential crisis can bring players to unprecedented performance levels. The English team is keeping the dream alive that one can thrive outside of Europe, even if some might wonder why the English still want to win European titles after Brexit. But that's a different story. And finally, we have the Italians. After failing to even qualify for the 2018 World Cup, the team has risen from the ashes to make the final, perfectly exemplifying the benefits of structural reform. Let’s hope European policymakers share my observations and draw similar economic conclusions.

With all of that said, we can't shake this sinking feeling. The crowds at the European football championships are an illustration of what may be the single largest threat to the European economy: the Delta variant of the virus. Thousands of football supporters celebrating with no social distancing could quickly qualify as a superspreader event. Let’s not forget that the outbreak of the virus in Europe in early 2020 (in Italy and Spain) was actually related to a Champions League match between Atalanta Bergamo and FC Valencia. No need to say more. As much as we would love to enjoy and celebrate a carefree summer, the risk of another wave of the pandemic remains.

In the meantime, hard data is gradually playing catch-up with buoyant soft data, both in the US and the eurozone. Here, the only risk seems to stem from ongoing supply chain frictions which have started to distort industrial data. In fact, these distortions could last slightly longer than previously expected. A similar assessment applies to recent inflation developments. With producer selling price expectations in both the US and eurozone at record highs, and service price expectations close to these highs, the chances of a pass-through to consumer prices are higher than ever. We still think that this period of elevated inflation will be transitory. However, the transition will last longer than previously anticipated and the risk of a more muted return to pre-crisis inflation numbers has definitely increased. As a result, both the Federal Reserve and the European Central Bank will soon have to discuss tapering, though this will be done as a means to withdraw monetary stimulus, rather than to slam on the monetary breaks.

At the time of writing, my call of an Italian victory at the Euro2020 could still materialise. No matter who wins the cup, most European countries have enjoyed the distraction and taken the opportunity to party after a long and difficult year. Let’s hope it's not been a deceptive party - a lull before the next big storm.