The Atlantic gap widened

Last week the first estimate for Q1 GDP was released for both the US and the Euro area and the contrast was striking. While GDP is now less than 1% below its pre-pandemic level in the US after a 1.5% qoq expansion in the first three months of 2021 – even before the full effect of Joe Biden’s emergency stimulus materialized – the Euro area fell back into recession, with two quarters in a row of negative growth. The quality of growth in the US is also impressive. True, as expected the biggest contribution to GDP in Q1 came from consumer spending as the economy is re-opening, but the most “forward-looking” components of investment are also very robust. Taken together, capex on software, R&D and information processing equipment contributed more than 1% to US GDP growth over one year for the first time ever. Businesses seem to anticipate Biden’s investment programme.

Still, the European outlook is brightening as well. In April, the services PMI in the Euro area has moved back in expansion territory for the first time in 8 months, a change confirmed by the European Commission survey. We look at the potential for a spectacular rebound in consumer spending when the economy reopens. France seems to be in favorable position, judging by the saving behavior there in the summer of 2020: it’s the only big country of the Euro area where the savings’ ratio came back very close to its long-term average after the Q2 peak. Incidentally we note that since the beginning of the crisis, the contraction in GDP has been larger in Germany than in France, although the difference is slim.

On both sides of the Atlantic, the pandemic remains of course the main risk. We are concerned by a deceleration in vaccination in the US, which may reflect resistance from a significant share of public opinion, jeopardizing swift progress towards collective immunity. There was a slight deceleration in France as well.

Yet, despite Jay Powell’s renewed efforts last week at reassuring on the Fed’s stance, real yields in the US rose again last week. We suspect the constant flow of new fiscal announcements from the US administration is fueling this. Meanwhile, in the Euro area long-term yields continued to rise despite the ECB’s acceleration in bond purchases. Financial conditions remain supportive, but we note that the EU is missing a chance to lock-in negative yields for its multi-annual mutualized Recovery and Resilience Fund.

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