C Covid-19

The Gap Between U.S. and Eurozone Growth Prospects Has Increased

24 March, 2021
Gap growth prospects


    Diverging vaccination schedules and fiscal responses have increased the gap between the U.S. and Eurozone growth prospects for 2021. According to Bloomberg data, on the day of the U.S. presidential election, consensus expectations put Eurozone 2021 growth 1.6% percentage points higher than the U.S. However, things have completely changed. Now, the U.S. is expected to grow at a pace that is 1.4% percentage points greater (with risks clearly skewed to the upside based on my forecast).

     

    U.S. Minus Eurozone GDP

     

    1. Vaccination schedules have evolved in the opposite direction

    Last Friday, the U.S. cleared President Biden’s goal of administering 100 million doses of COVID-19 vaccine, more than a month before the target date of his 100th day in office. With the nation administering about 2.5 million shots per day, Biden already teased the possibility of reaching 200 million doses by his 100th day, April 30. As a result, U.S. population aged 65 and over could be fully vaccinated by that date. On the opposite, Eurozone will probably push back its targets amid production delays and concerns about the effectiveness and potential side effects of the AstraZeneca jab. Therefore, it now seems very unlikely that people aged 65 and older can be fully vaccinated by the end of June.

     

     

    In the meantime, the inability to deploy vaccines quickly, the increasing part of variants and adverse weather conditions have resulted in a third wave of new confirmed cases. As a consequence, most of Eurozone countries (France, Germany, Netherlands, etc.) were forced to implement or extend restrictive measures. As already mentioned by Christine Lagarde, it will likely result in another GDP contraction in the Eurozone in 1Q21. On Monday, the Bundesbank confirmed that “the German economy is likely to shrink sharply this quarter as pandemic-fighting curbs hit the services sector and even the booming construction industry slows“.

     

    2. Fiscal responses have drifted further apart

    It’s clear that the recent U.S. fiscal response has been massive (and very fast) with the $900 billion fiscal stimulus voted in December, the $7.6 billion Californian package in February and the $1.9 trillion fiscal boost signed in March. Given that more than $1.0 trillion of the $1.9 trillion package will hit the economy in the fiscal year that ends this September, U.S. GDP growth should remain elevated until at least 3Q21. In addition, high frequency data already pointed to a massive economic rebound as soon as March that should support 1Q21 GDP.

    Meanwhile, Bloomberg reported that “The European Union’s pandemic recovery fund has run into early trouble with the bloc’s executive arm judging that most national spending plans submitted so far still need work to get approved, raising the risk of delays in disbursements to some of the region’s battered economies.” Bloomberg added that “For money to be distributed this summer as planned, proposals need to be cleared in April and some countries risk missing that deadline.” In other words, we can’t exclude that Eurozone funds will be delivered after the summer holidays.

    In addition to the delay related to disbursement, the divergence in size is likely to have significant implications with U.S. growth prospects being largely higher. According to my calculation, the level of excess savings accumulated since March 2020 should exceed $2 trillion in the U.S. by the end of 1Q21 (9.3% of nominal GDP) while they should only reach €450 billion in the Eurozone (3.5% of nominal GDP).