Julian Marx (Flossbach Von Storch) | Almost two years have passed since the outbreak of the pandemic and economic output in the Eurozone is still below pre-crisis levels, unlike in the US.
For almost two years now, the pandemic has been the headline topic in the media. We are experiencing an unusual situation, even beyond the health and social spheres.
At the macroeconomic level, the pandemic has come hand in hand with an economic collapse of historic dimensions. In the second quarter of 2020, real economic output in the US fell by 9.4% compared to the same quarter of the previous year. In the Eurozone, real GDP fell by 14.5% and in the UK by as much as 20.8%. Not only was the magnitude of the recession unprecedented in peacetime, but its synchronization around the world was a first.
The good news is that, with vaccines, confinement measures have been lifted in many countries. As a result, economies around the world are back on the road to recovery. In 2020,China was the first economy in the world to return to pre-crisis levels. One only has to look closely at the developed countries, however, to see why the European Central Bank (ECB) envisages a more cautious monetary policy than the dollar bloc (Australia, Canada and the US): real economic output in the US in calendar year 2021 should already be a good two percent above that of 2019. In the eurozone, on the other hand, the statistics for 2021 will probably remain in some cases significantly below the pre-crisis level.
One of the main reasons for this development is probably the expansionary fiscal policy in the US. With a total deficit of $5.9 trillion, the US government made a significant contribution to the US economy to develop much more dynamically than that of the eurozone in the last two financial years. Instruments such as short-term subsidies and bridging grants in the eurozone countries only partially replaced the income losses that had been recorded. On the other hand, the unemployed in the US were able to increase their incomes thanks to generous unemployment benefits and additional income checks. The government spent about $1.5 trillion on these two spending blocks mentioned.
Why is the dollar area economy growing so much faster?
This “overcompensation” of US households has so far translated into sustained strong consumer demand, reflected in record retail sales. The US economy is likely to be able to build on this momentum in the new year. The International Monetary Fund (IMF) estimates that the US economy could grow another 5% next year. Thus, real US economic output in 2022 would already be eight percent above the pre-crisis level of 2019.
In Europe, however, hopes are high for the EU’s Reconstruction and Recovery Mechanism, which will provide €723.8 billion in grants and loans. However, the impact is not likely to be felt until next year. Nevertheless, it is likely that the eurozone economies will barely be able to surpass their pre-crisis levels. If one also takes into account that the development of the pandemic, with possible further closures, was not yet foreseeable at the time of the forecasts, even these estimates could prove to be too optimistic.
In the meantime, the stock markets are rushing ahead despite the weak recovery in the euro zone and the UK. Nor have they been impressed by the latest developments in the pandemic stuation.
There is good reason to believe that they could hardly react even to a further worsening of the pandemic. On the one hand, because the past year has shown that a very expansionary fiscal policy is willing to generously cushion temporary revenue shortfalls; thus, demand should quickly return to current levels in a return to normality. On the other hand, because the persistence of pandemic uncertainty could be an argument for central banks to tighten interest rates only very cautiously, if at all. Therefore, the relative attractiveness of equities would remain high even in such a scenario.