Inflation, Europe, EM

Rocky Mountain Economic Summit Inflation, Europe, EM

Megan Greene Senior Fellow, Harvard Kennedy School Senior Advisor, OECD Columnist, Financial Times Twitter: @economistmeg July 2021

Inflation debate reflects massive philosophical schism in economics US Stimulus (legislated) vs Output Gap:

Source: CBO, Larry Summers.

Small firms complaining they can’t find workers…again Small businesses’ biggest challenges:

Source: NFIB.

Firms planning to raise prices, not wages Little sign of a wage spiral:

Source: NFIB, TS Lombard.

Consumer wage expectations still low Consumer expectations for income:

Source: Conference Board, TS Lombard.

Inflation expectations still well-anchored Inflation expectations muted in medium-term

Source: Bloomberg.

Some drivers of inflation abating Inflation drivers:

Source: Bloomberg.

European surveys outperform Surveys outperform:

Source: IHS Markit, ifo, INSEE, INSTAT, European Commission, Morgan Stanley Research.

EU catching up on vaccinations Covid-19 vaccines, % of population vaccinated per day (7-day moving avg):

Source: The Economist.

Potential impact of Delta variant on tourism in SEurope GDP Impact From New Delta Variant Restrictions in 3Q (%)

Source: Morgan Stanley Research.

Also vulnerable: - France (vaccine hesitancy) - Eastern Europe

Fiscal help is coming, but probably won’t help much Absorption of EU funds: 100 90 80 70 60 50 40

2007-2013 MFF (ERDF+CF+ESF)

30

2014-2020 MFF (ERDF+CF)

20

2021-2026 NGEU grants

10 0

2021-2026 NGEU loans Year 1

Year 2

Source: Breugel, Zolt Darvas..

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 10

Emerging Markets in for a rough ride as rates normalize Debt burdens rise significantly (% of GDP):

Source: IMF.

EM external balances remain muted, but could change quickly:

Source: IIF, Haver.