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The Gaping Atlantic Divide
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Andrew Kositkun Senior FX Advisor
Yesterday’s commentary touched on the historically large amount of fiscal stimulus, both realized and proposed, in the U.S. The upshot of this is the expectation that U.S. growth will be significantly stronger than most of the world, and Europe in particular.
The reasons for this divergence in growth expectations are not much of a mystery. The first and most influential reason is the dramatic difference in the fiscal response to the crisis across various countries. According to International Monetary Fund (IMF) estimates of fiscal stimulus as a share of GDP as of last September, the U.S. stands out at 11.8%. To put this into context, that is more than double the unweighted global average and more than double the U.S. fiscal stimulus during the Great Recession of 2008–09.
But the IMF’s analysis is just the start of the growing fiscal gap. More recent stimulus that has been rolled out in other countries has been on the smaller side versus the massive proposals in the U.S. Back in December, the U.S. added another package worth 4.3% of GDP, and in January, President Biden proposed a 9.0% of GDP package. Even if only half of Biden’s proposal gets realized, the amount of fiscal stimulus in the U.S. will be at unprecedented levels.
Another reason to expect U.S. outperformance relates to the COVID-19 crisis. There are two factors in play. The first is that the U.S. is moving more aggressively in vaccinating its population than Europe and more of the world. Better federal funding and leadership in the U.S. means that the U.S. could vaccinate up to 1.5 million a day. Based on expected vaccination rates, the U.S. should have its vulnerable population vaccinated a full month earlier than Europe. The second factor is the ability of the U.S. to handle high caseloads. Hospital capacity remains the main driver of local containment measures, and this suggests a smaller lockdown in the U.S. today and a faster recovery in the spring. A final, but less compelling, factor is the expectation for the Fed to be more dovish, relative to the European Central Bank (ECB), for any given inflation and unemployment profile given the Fed’s commitment to overshooting inflation.
U.S. growth is also expected to outgrow emerging-market economies, excluding China, next year. Rising deficits and debt levels in many emerging-market countries means these countries are running out of fiscal space. Further, many of these countries are well back in the queue for vaccines, making them doubly vulnerable to the more virulent strains of the virus.
Of course the biggest downside risks to growth in the U.S., Europe and elsewhere is the surge in the more contagious strain of the COVID-19 virus. But here, the U.S. maintains an advantage with its relatively larger “fiscal put” that gives protection to the U.S. economy.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
President Biden’s stimulus package is on the fast track to pass the Senate through budget reconciliation that will allow passage with a simple majority rather than the usual 60 votes. Democrats have opened the debate on a budget resolution and will take up its final passage tomorrow, when the $1.9 trillion package is expected to pass with a simple majority.
U.S. ADP employment figures came in much better than expected, as private employers added 174,000 jobs against expectations for 70,000 additional jobs. Last month’s contraction of 123,000 lost jobs was revised up to a loss of 78,000 jobs. The important government nonfarm payroll jobs report is scheduled to be released this Friday, with market consensus currently for the economy to add 88,000 jobs.
U.S. ISM services PMI beat expectations as the series came in at 58.7 versus consensus for a 56.7 print. The services employment component also expanded by the most in 11 months.
Mario Draghi could be Italy’s next prime minister, but this is far from a done deal, with anything, including new elections, being possible. Draghi has agreed to try and form a government after meeting with Italian President Sergio Mattarella following former Prime Minister Giuseppe Conte’s inability to rebuild a working coalition. Assuming there is a Draghi-led government, it is hard to assess what a Draghi administration would be like without knowing the composition of the coalition government. However, it is expected that Draghi will push to deepen integration within Europe and instill confidence in Italy’s economic policies.
Euro area inflation rebounded in January, as CPI increased 0.2% month over month against expectations for a 0.1% decline. The move higher in inflation was driven by a combination of technical factors, including the unwinding of negative base effects. The continued easing of lockdown restrictions should see further inflationary pressures, but the euro area’s output gas is likely to keep inflationary pressures in check over the medium term.
Reserve Bank of Australia Governor Philip Lowe delivered a dovish message. In his speech, the governor noted that the central bank’s asset purchase program has helped lower interest rates and pushed the Australian dollar lower than it would otherwise be. Further, the governor stressed that interest rates would not rise until after 2024 or later.
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