While we may gaze enviously at the pace of vaccine roll-outs in the UK or the US, so too might the European economy look enviously to the US at its pace of economic growth in the face of the pandemic.
While economic forecasts are being revised up for the US, with some now suggesting a strong first quarter and 8% or more for the year as a whole, here in Europe we are likely facing into a double-dip.
We came out of 2020 with a negative Q4 and it is now looking like the current quarter will also be in the red. We have seen the EU Commission reduce its economic forecast for the full year and push out the recovery phase more into 2022.
We shouldn’t be surprised.
We are still in the grips of a pandemic and many economies are as closed as they ever were in 2020. Fears over a third wave are in fact leading to increased lock down measures in Italy, France and elsewhere. Looking at Covid-impacted sectors (transport, education, construction, etc.) current activity levels in Europe are 63% below where they were pre pandemic. Lock-down stringency has been increasing across Europe since the end of October and as current actions show, isn’t easing soon.
As an example, air traffic in Europe currently is tracking at around 20% of 2019 levels. But in the US, that figure is up to 50% with over a million people boarding planes every day on average.
Some market forecasters are fearful of the US economy actually overheating. Bond investors have become increasingly skittish. And the path of the recent Covid relief package through Congress wasn’t easy, as many Republicans view the economy as doing just fine. They see little need to fuel the economy even further.
Why the vastly different experiences on either side of the Atlantic?
A stuttering vaccination programme in Europe isn’t helping. The US, which had lagged initially, has now 13% of the population fully vaccinated, which is better than what Europe has achieved for the first dose alone. Supply issues and efficacy concerns have dogged the European roll-out. While there will likely be some catch up as vaccines become more plentiful, this still pushes the collective immunity threshold date further out – perhaps beyond the summer. This then becomes time critical for those European economies who depend a lot on tourism. Tourism related activities account for 11% of GDP in Southern Europe and France and 17% of total employment. If tight restrictions, similar to current, are in place to the end of Summer, it will knock a further 1-2% off GDP and be felt most in Spain, Italy Greece and Portugal.
The other driver of the economic gap is quiet simply that governments like the US have just spent more. Looking at the amount of fiscal support relative to the size of the economic implosion that we saw in all economies, the big spenders were the US, Australia and Japan while spending in Europe was substantially lower as a percentage of GDP. And this is before the most recently agreed Biden package – so the US will surpass all major economies. This support will help generate a strong economic recovery in the near term, though will have to be financed at some point in the future.
The European economy may well emerge from this soft spot and see a lift off from Q2. It’s all really down to the numbers and the battle between the vaccines and the variants.
At that point, other factors may kick in to spur growth, such as a sharp boost to consumer spending as pent up demand meets excess savings. European banks have seen a near €600 billion increase in consumer deposits in the past year. Tourism would be a major beneficiary of such spending.
Still, the most likely outcome for 2021 is that growth in the US economy will be well over double what we get here in Europe.
Tradewinds 