Still no smoking gun

07 June 2021 (5 min read)

Key points:

More signs of supply-side tension on the US labor market, but still no sense of a permanent shift.
The ECB will need to choose its words carefully on Thursday. Optimism on the reopening needs to be tempered while the latest pandemic developments in the UK are being assessed.
The G7 agreement on global corporate taxation is another blow to the already ailing “Washington consensus”

More signals of supply-side tension in the US have emerged with the release of the labor market data for May. We focus on the strong rebound in the relative pay of low-skilled workers in the hospitality sector which is taking place even though the number of jobs of this type is still more than 15% below the pre-pandemic level. This would suggest that employers are consenting to significant pay rises to lure employees back. There is no clearer indication than last month on which explanation – childcare issues or over-generous unemployment benefits – dominates, and we may never know since those hurdles are likely to fade broadly at the same time. The ongoing reopening of the US is extending to schools, while nearly half of the states have decided to terminate the federal top-up of unemployment benefits ahead of schedule, in general by July (it could have continued until November). In any case, since those factors are both transitory, as such they cannot sway the Fed in one direction or another.

The ECB has communicated profusely ahead of its Governing Council this Thursday, which should insure us against anything revolutionary. Still, they will have to choose their words wisely to qualify the pace at which PEPP is continuing. We continue to think they will abstain from any significant rhetorical shift this time, waiting to see how the reopening of the European economy is shaping up. The Governing Council is probably taking a hard look at the latest pandemic developments in the UK. The rebound in hospitalizations is still very tentative over there, but it is already a reminder of a very simple truth: with aggressive variants, the threshold for collective immunity rises. Although the UK is among the most advanced countries on vaccination, there is still a “reservoir” of more than 4 million people above the age of 50 who have not been fully protected. This still leaves open the possibility to see more pressure building on the healthcare system.

The G7 agreed over the weekend on the “two pillars” of the strategy laid out by the OECD on global corporate taxation. It will still take a lot of work before any decision is implemented. Still, at this stage we can already add this piece of news to our already long obituary of the “Washington consensus”.

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