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Eurozone growth overtakes US in surprise turnaround


The two biggest global economies have just released preliminary GDP growth figures for the second quarter of 2021, and the results have surprised the consensus and investors.

The US economy grew by 6.5% on an annualised basis (1.6% quarter-on-quarter, q/q) and 12.2% year-on-year. This is strong growth by historic standards, but consensus expectations were loftier at 8.5% growth (2.1% q/q).  In contrast, the eurozone grew at the faster rate of 2% q/q (13.7% year-on-year, y/y), beating consensus expectations of 1.5% growth.

US - strong but disappointing

The US economy continues to perform well with consumer spending contributing 7.8 percentage points (annualised) to growth. It’s clear, however, that the supply side of the economy has been constrained of late. Business investment only added a percentage point, while housing investment was a slight drag along with government spending. Inventories, which are reportedly running very low according to business surveys, fell at a faster rate in Q2, and subtracted a percentage point from overall growth.

Inflation also played a role in dampening the figures. Nominal GDP growth surged by 13% (annualised), but much of this was offset by inflation, which rose to 6%.

We continue to expect inventory rebuilding to provide a tailwind for the economy later this year. Additionally, as we highlighted in our recent note, there is great scope for households to increase spending, thanks to the accumulation of abnormal excess savings. Moreover, inflation is forecast to peak soon, and so its impact on GDP in real terms will diminish in the second half of the year.

Eurozone – surprisingly stronger

In contrast with the US, the eurozone’s latest quarterly data benefited from the partial removal of Covid-19 related restrictions, helping many businesses to return to some form of normality. This is likely to be a temporary boost, although not all activity has returned to normal, and so may persist a little longer.

Within the largest member states, Spain led the way achieving 2.8% growth q/q against expectations of 2.2% growth. Italy then followed with a big consensus beat – growing by 2.7% against expectations of just 1.3% growth. Meanwhile, Germany disappointed as it grew by 1.5% versus 2% consensus estimates, and last France achieved 0.9% growth, slightly ahead of expectations of 0.8%.

We don’t yet have a breakdown of the components of GDP growth. Reports from the German and French statistics agencies, however, suggest that household and government consumption made significant positive contributions, while business investment has also started to recover.

Like the US, the rebuilding of inventories has yet to make a significant positive contribution, which is still likely to follow later this year. The fall in the elevated household savings rate should also provide strong support for further consumption growth, as we highlighted in a recent note.

Central banks to diverge again

Eurostat also reported its flash estimate for eurozone inflation today, which rose to 2.2% y/y in July compared to 1.9% in June. This is the highest rate since October 2018. While elevated for Europe, inflation is clearly less of a problem than it is in the US, where June’s CPI reading reached 5.4% y/y.

Inflation across the monetary union is forecast to continue to rise through the course of this year, but peak at just over 3% before falling back. This should give the European Central Bank (ECB) plenty of cover to keep its quantitative easing programme going into next year, and interest rates on hold for some time.

Meanwhile, the Federal Reserve (Fed) this week indicated that it is considering starting to taper its asset purchases. Though the economic recovery is on track, and GDP has returned to its pre-pandemic levels, the labour market still has some way to go before spare capacity is eradicated.

We expect tapering to be announced sometime after the Jackson Hole Economic Symposium in August, with actual tapering beginning by the end of this year. Our baseline forecast also has the Fed raising interest rates by the end of 2022, which will mark a significant divergence from the ECB. This could have consequences for the performance of the euro against the US dollar.