David Kohl (Chief Economist Germany, Julius Baer) | In dealing with the corona pandemic, Europe seems to be doing increasingly better, while the number of new infections remains high in the US. Economic indicators mirror these developments. Daily activity indictors reveal an earlier and more severe drop in economic activity in the eurozone than in the US, Canada or Japan in March, reflecting largely the more stringent virus containment measures. The reward is a more pronounced recovery since May, after restrictions started to be eased. Daily data suggests that activity in the eurozone countries has reached 92% of the pre-crisis level, while the US stagnates at a level of around 67%.
The swift recovery in the eurozone comes as a surprise and challenges our long-held view of US growth superiority during the corona crisis, given the more pronounced government support. The US quickly mobilised a fiscal response of more than 13% of gross domestic product (GDP), while the eurozone was initially more hesitant, assuring about 9% in late April as Italy and Spain were financially constrained. Since then, however, the fiscal response has increased on national levels, lifting the eurozone total to nearly 13%. In addition, the European Union (EU) Commission is pushing for an EU recovery fund, which would extend support to more than 16% of GDP. The EU recovery fund contributes also to a fairer distribution of the support within the eurozone. Eurozone growth estimates now appear overly pessimistic, as more fiscal support and a swifter rebound of activity are not fully acknowledged. The International Monetary Fund has lowered its 2020 growth projection to -10.2% in the last months and the European Central bank expects a -9.3% contraction, while the EU Commission lowered its projection last week to -8.7%. We feel comfortable in expecting a more moderate contraction of -7.2% in 2020.