Key points

NB: The next issue of Macrocast will come out on 30 August. We wish our readers a great summer break.

  • We review the latest instalment of the “debt ceiling drama”, the spread of the “delta variant” and the European Central Bank (ECB)’s new forward guidance.

As Macrocast is about to take its usual summer breather, we looked back at what we were writing exactly a year ago: focus was on a pandemic resurgence and political difficulties getting fiscal decisions through in the US. The impression of “déjà vu” is striking. It does not mean that the world economy is not making progress though.
We have no doubt as to the ultimate resolution of this new instalment of the debt ceiling drama in the US. It may take a bit of time – Republicans would relish a “Democrats only” debt ceiling extension which would help them to brand their opponents as spendthrift in the mid-term elections, while Biden’s party will want to show they are being forced to do so to avoid an economic catastrophe – but the market is probably quite blasé about it. Paradoxically, while in principle the dispute should be consistent with a higher risk premium on US federal securities, the suspension of debt issuance for some weeks, adding to the scarcity of US paper chased by massive liquidity, may contribute to keep US yields transitorily lower than what fundamentals would suggest.
Obviously, the spread of the “Delta variant” is a significant risk to the reopening of our economies. However, we take some comfort in the shift towards tailoring restrictions to individuals’ vaccination status.  Allowing the continuation of contact-dependent activities for fully vaccinated people would eliminate the need to reinstate blanket prohibitions in key services industries which have been badly hit by the pandemic. Since the beginning, in advanced economies every new wave of the pandemic has been less economically destructive than the previous one. This pattern may not change this time, even if some additional damage is unavoidable.
Still, massive policy support remains needed and from the point of view the ECB’s new forward guidance came out even more dovish than we thought. They promised more of the same for longer with unexpected clarity. A more intense stimulus seems out of question though. The ECB will probably continue to face a “credibility gap” versus the Fed when it comes to delivering on its now more ambitious definition of price stability. 
So, yes, policymakers and economic agents at large are still grappling with the same kind of issues 18 months into this pandemic, but in the hope our readers will allow us a non-economic reference, “one must imagine Sisyphus happy”.

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