What’s Happening in the World Economy: Europe to Take the Growth Baton

Hello. Today we look at whether Europe will be the next global growth driver, examine China’s census and discuss if inheritance taxes are set for a comeback.

A New Leader

The European economy just flopped into a double-dip recession, but it already seems to be bouncing back and could even start outpacing the U.S., providing another engine for global growth.

Among the reasons for optimism: economies are reopening, the delivery of vaccinations are finally accelerating and the European Union’s multi-year joint stimulus fund is set to take off to complement already ultra-loose monetary policy.

By the third quarter, economists at Goldman Sachs reckon euro-area output will be accelerating at an annualized pace of 13%. In contrast, they think U.S. growth will peak at 10.5% in the current quarter as the pace of vaccinations slows.

“The continent is well-placed for a period of substantially above-trend growth if the path of the virus in coming months resembles what we have seen in other economies with successful vaccination programs,” the economists led by Jan Hatzius told clients in a report on Monday.

The U.S. and China will remain the leaders over the whole of 2021, according to the most-recent International Monetary Fund forecasts. The 6.4% projected for the U.S. outpaces the 4.4% envisaged for the euro area.

But next year, the euro area is seen expanding 3.8% compared to America’s 3.5%.

Growth Outlook

The euro-area economy is predicted to outpace the U.S. next year

Source: IMF

Regardless of which economy is faster, the existence of multiple sources of demand is a good thing. Remember that after the 2008 financial crisis and recession, Europe succumbed to malaise as it was swept by debt turmoil.

The transition is already starting to show up in the data. An index of eurozone manufacturing purchasing managers reached its highest level in the survey’s 24-year history, while the U.S. equivalent slipped from its recent high.

It will be interesting to see how the European Central Bank views any growth spurt. In the post-crisis years it hiked interest rates only to discover the inflation shock it was worrying about was a mirage.

This time there is no talk of rate hikes any time soon, though Governing Council member Martins Kazaks did tell Bloomberg last week that it could decide as early as next month to scale back its emergency bond-buying program.

Simon Kennedy

The Economic Scene

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