The loosening of COVID-19 restrictions gives hope for a quick economic rebound.
Different pandemic responses postulate a two-speed recovery across the Atlantic — faster in the United States and slower in Europe. The size of the fiscal stimulus in the U.S. has been an economic engine that is crucial to the rapid rebound of the world’s largest economy. The U.S. economy is expected to grow briskly, while the eurozone and the European Union will be limited by reduced public spending, more-commonplace business restrictions and a slower pace of vaccinations.
There are additional reasons that will cause the U.S. economy to return to its pre-pandemic levels before that of the EU. Economists have noted that the EU’s “institutional problems” are an obstacle to its recovery. Last year the member states surprisingly united to approve the creation of a 750 billion euro recovery fund. Unfortunately, these funds are still unavailable to the 27 member states. There are several necessary steps before the European Commission can tap the financial markets and borrow the necessary funds. There is an appetite for the funds as well as hope that they will become available this summer; France and Germany are calling on Brussels for a fast approval of national plans. In comparison to this, U.S. President Joe Biden delivered his $1.9 trillion fiscal stimulus package within two months of assuming power.
One of the biggest differences between the U.S. and the eurozone is in the size of the 2020 crash; Europe’s economy suffered greater losses. While the U.S. economy shrank by 3.5%, the eurozone shrank by twice as much — 7%. The size of the challenge facing the EU and its member states should naturally lead to bigger efforts aimed at supporting a recovery in 2021. Predictions point to an EU member states gross domestic product increase of 4.4%, while the U.S. GDP is expected to grow by 6.4%.
The first fiscal quarter of 2021 betrays an even bigger dissimilarity — the U.S. economy grew by 6.4% compared to the fourth quarter of 2020, while the EU economy shrank by 0.6%. The EU and the eurozone lapsed into a technical recession for the second time within a year. The good news for Europe is that despite a delay, the economy’s outlook should be positive after the removal of restrictions and increase of vaccinations — the current economic outlook will change rapidly.
An Economic Gap
If predictions for growth in 2021 are correct — there are even more-optimistic opinions on the growth of the U.S. GDP — the difference between the two sides of the Atlantic will grow. U.S. employment data showed that the economy created 900,000 jobs in March. This was the best report since August 2020. However, the April data showed a decline — a signal that the labor market is still volatile. The outlook of other economic indicators coming out from the last weeks of March — from public outings to Google searches — leads one to believe that the pace of recovery has further increased. This is good news, as despite the positive employment updates, there are still 8 million fewer employed Americans now compared to before the pandemic.
Non-government data, which the private sector produces more often compared to official labor statistics, is a useful identifying tool displaying crucial economic indicators, indicators that would show in official government data with a delay, much later. In March and April 2020, before official statistics became available, such non-government indicators showed an economic collapse. A year later these indicators show the opposite. The Economist used mobile data compiled by Google to create an index of economic activity measuring attendance at the workspace office, retail outlets and places of recreation. Two months ago, the index showed attendance that was 30% lower than pre-pandemic levels; at the beginning of April it was only 20% lower. Other such data shows similar trends: travelers going through airports and hotel occupancy rates have been rapidly growing.
The accelerated pace of vaccinations leads to the removal of restrictions, at the same time people have money to spend. Data from the U.S. Treasury shows personal deposits of $250 billion for March, a figure in addition to $1.5 trillion already deposited into personal savings accounts (about 10% from total consumer yearly spending) funds that households have accumulated by the end of 2020.
The result of this is the likelihood of the U.S. experiencing a significant GDP growth in the second quarter of 2021. This could lead to the creation of 1 million jobs in a single month. Pre-pandemic levels of employment could be reached soon.
Contrastingly, optimism in the eurozone is muted, hence the exhortations for continued fiscal measures. During the annual meeting of the World Bank and the International Monetary Fund, U.S. Treasury Secretary Janet Yellen warned leading economies that a strong recovery will require significant fiscal support.
The IMF is even more definitive — eurozone countries should provide additional fiscal stimulus of 3% of GDP in the next year in order to compensate pandemic-caused economic contractions. The IMF expects the EU to experience a slower recovery compared to its biggest trade partners due to the slow pace of vaccinations, COVID-19 lockdowns and lower fiscal stimulus compared to that of the U.S. Zsolt Darvas, senior fellow at the Bruegel think tank, has said that the vaccination progress is “much stronger” in the U.S., and consequently the U.S. economy is likely to be fully opened before the EU.
The IMF also points out that advanced EU economies are expected to lower their fiscal stimulus from 7.5% of GDP in 2020 to 6.5% in 2021. The increase in public spending will stimulate the eurozone economy’s growth by 2%, and will lower the expected loss of jobs, investment and manufacturing due to COVID-19. The IMF recommends European governments increase their spending tailored to needy households, provide funds toward job training for the unemployed and create temporary tax breaks for business investment. There are proposals on shareholding plans for viable businesses needing capital. The IMF warns that “if monetary policy becomes less effective in supporting growth then fiscal policy must play a bigger role.”*
European Central Bank President Christine Lagarde likened the eurozone economy to a patient coming out of intensive care with two crutches. “You don’t want to remove either crutch, the fiscal or the monetary, until the patient can actually walk fine and to do that means support well into the recovery.”
Some European countries are already on such a path. Germany approved additional 60 billion euros in spending and Italy is preparing a fiscal package worth €40 billion, or 2.5% of its GDP — a figure that could increase its budget deficit to over 10% in 2021. Former European Central Bank President Mario Draghi, who became Italy’s prime minister in February 2021, insists that his country and the rest of Europe must spend significant resources in supporting their own economies in order to limit the pandemic’s damage.
The Power of Savings
Many consumers in the developed world have managed to save during the pandemic. This is partly due to the governmental stimulus and partly due to the lack of spending opportunities caused by pandemic restrictions.
Toward the end of the third quarter of 2020 the mean rate of personal savings in the U.S. was 15.7% (savings compared to available personal income). This is lower than the peak of 25.8% from the worst months of the pandemic, but still significantly higher than the average rate of savings from 2020. At the same time, the savings of eurozone households reached 17.5% at the end of September, according to Eurostat. This is lower than the peak rate of 2020 but much higher compared to pre-pandemic levels. The rapid vaccination effort in the U.S. has allowed consumers to spend their savings sooner.
Higher Unemployment in the EU
Both the U.S. and the EU highlight the need to limit job losses. Due to measures taken by both sides, job losses were somewhat limited and the total number of unemployed was lower than the peak of the 2008 financial crisis. It is expected that unemployment claims will decrease faster in the U.S. compared to the eurozone despite the parity between the two in 2020. In 2021 unemployment will decrease to 5.7% in the U.S., while the eurozone will see a smaller change, from 8.7% to 7.9%. Experts believe that the future discontinuance of EU governments’ stimulus policies supporting job creation and retention will lead to potential business insolvency and an increase of unemployment.
Despite the recovery’s different speeds across the Atlantic, the beginning of 2021 is very good for the U.S. and not too bad for the EU. The feeling is that more economic good news is to come.
*Editor’s Note: This quotation, accurately translated, could not be verified.
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