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FINANCES | 30.04.2021

The US and Europe: a two-speed recovery

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The latest forecasts reveal differing rates of growth on either side of the Atlantic. The Biden administration’s speedy fiscal response, the rapid vaccination campaign and the stimulus plan have been some of the decisive factors that have set the US apart from Europe in terms of recovery.

The United States has completely broken the mold. In these difficult times, the world’s top power has surprised everyone by reaching cruising speed in its recovery. Forecasts are on an upward trend thanks to the country’s rapid response in undertaking unprecedented measures to contain the coronavirus crisis.

Data from the Economic and Industry Outlook compiled by MAPFRE Economics confirm the economic upturn projected for this year, with 6.6 percent growth now forecasted after a 3.5 percent decline in 2020. By contrast, Europe has been lagging behind and current estimates are less optimistic with an expected growth of 4 percent in 2021, although this will be largely contingent on the impact of the restrictions that may be implemented in the coming months. These figures suggest that the US and Europe are treading two markedly different paths to recovery.

The International Monetary Fund (IMF) has already warned that both paths could “diverge dangerously.” This is in line with recent statements by European Central Bank (ECB) President Christine Lagarde, who said that, despite the ECB’s intentions to “move in tandem” with the US Federal Reserve, the two economies were not on the “same page.”

The new MAPFRE Economics update on monetary policy highlights these minimal adjustments by the EU, as well as the ECB’s intention to maintain interest rates and speed up the PEPP (Pandemic Emergency Purchase Programme). Meanwhile, the US—which has implemented the largest stimulus plan seen since the post-war period—plans to roll back its expansionary policy if the upcoming data on growth, unemployment and inflation confirm the positive trend.

All of this means that the data appear to threaten a widening of the economic gap between the two blocs.

Why are two different paths emerging?

It is a fact that the vaccination campaign has been one of the biggest differences in the ultimate goal of immunizing the entire population and recovering pre-pandemic activity levels. The problems with vaccine supplies and the lack of initiative to accelerate the plan in the EU have shown that the US is two steps ahead: Joe Biden’s administration has so far given the first vaccine dose to over 40 percent of Americans (around 140 million people).

Meanwhile, in Europe, the rate of vaccination has been slower than expected, and it is still a long way off the target of immunizing 70 percent of the population by summer. Now, facing the prospect of increased restrictions due to a new wave of coronavirus, the eurozone could suffer further delays to its economic recovery.

That said, the US and the EU are both taking the same expansionary tack with their recovery programs, through the purchase of debt by central banks. So far, the ECB has maintained its stimulus levels, and everything points to them remaining as they are throughout 2021. The US, “with a faster achievement of its targets for inflation and full employment,” will look to reduce its quantitative easing should the data remain optimistic.

The MAPFRE Economics study also notes that central banks’ willingness to provide direct aid has been a relief for states. In this sense, both blocs have succeeded in pursuing powerful fiscal policies to revive the economy. In the US, Biden approved an unprecedented 1.9 trillion dollar package of family and business aid that will have a “direct impact on consumption and savings.” By contrast, Brussels is still in the midst of adopting the Next Generation EU Plan (NGEU) involving 1.8 trillion euros, which will belatedly reach countries this year.

Finally, since the end of 2020, a change in price dynamics has been observed. In the US, inflation has stubbornly remained above 2 percent since the outbreak of the pandemic, although it is still lower than expected (the scenario for this year is 2.7 percent). By contrast, Europe’s targets are unclear in relation to inflation, which could remain at 2 percent this year. It has had varying prospects due to exceptional events such as Germany’s tax reforms, taxes on CO2, and the effect of Storm Filomena in Spain, among others.

What will happen next?

In the eurozone, the intensification of asset purchases remains a sign of the ECB’s commitment to supporting recovery in the short-term. The study underlines that Lagarde’s intention to increase the stimulus program gives the sense that there will be no premature quantitative tightening. Moreover, the sustainability of the financial system does not at present appear to be jeopardized by liquidity, low interest rates and central bank support.

However, in a scenario of greater uncertainty, the control over price stability, the risk of an increase in company insolvencies (with the consequent increase in late payments for banks) and mismanagement of European funds could create serious difficulties in the effort to halt the crisis in the long-term.

Over in the US, the most recent estimates suggest that the recovery will take place sooner than expected. This is the result of an expansionary policy that appears to be gradually being rolled back and that could give way to more restrictive measures. Experts add that the Fed has the complicated task of “conveying clarity in its employment objectives and flexibility in inflation.”

Looking at the medium- to long-term, the central bank may open up a can of worms by attempting to revive the Phillips curve, in which the relationship between unemployment and inflation remains flat. These measures could overheat the economy and jeopardize the country’s financial stability.