The recently passed American stimulus package (i.e., the American Rescue Plan Act of 2021) significantly ratchets up the growth outlook in the United States for 2021 and carries some of that growth into 2022. The forecast has been raised for the first quarter from 2.9 percent to 4.7, and for the entire year, the forecast increases to 5.7 percent from 4.9 percent. The total economic stimulus in the United States now totals about 38 percent of U.S. GDP, compared with stimulus measures in Europe, which represent about 21 percent GDP. As a result, the U.S. recovery will accelerate and further diverge from Europe, which will likely see flat to negative growth in the first quarter. But even beyond the first quarter, the growth in the United States will far outstrip growth in Europe.
China is also set to see strong growth in 2021. Earlier this month, Chinese Premier Li Keqiang announced the country would target growth of over 6 percent for 2021. The current forecast is calling for 8.4 percent growth. China grew 2.3 percent in 2020, the only major economy to grow during the year.
The strengthening recovery in the United States will help other countries as well. Mexico and Canada will both benefit, as will countries like China. The overall global economy shrank roughly 3.8 percent in 2020. It is expected to expand 6 percent in 2021.
The additional stimulus in the United States comes at a point in time when the economic recovery is already beginning to accelerate, and this adds additional fuel to the economy. Vaccination rates have steadily been increasing. President Biden had set a goal to administer 100 million vaccinations in his first 100 days in office. Arguably the country was already close to that rate when he was sworn in, but the goal will be reached around his 58th day in office. The United States has now vaccinated about one-third of its population. The United Kingdom is close to 40 percent.
For the European Union, it is about 12 percent of its population. This is a further headwind to Europe’s recovery because it hinders confidence and economic activity. In recent weeks, parts of France have gone under a third lockdown.
Overall labor growth
Another key area of growth is the labor market. The economy should add jobs back at a fast clip in the next few months. There were some 6.9 million job openings in January in the United States, the highest level since February 2020. Businesses look ready to hire. The U.S. economy could add six million jobs in 2021, the largest annual addition of jobs in history. But the job market will still be four million jobs smaller than it was pre-pandemic. There is some risk of a mismatch in the labor market, as businesses look to hire for the positions they want to have in the years ahead, as opposed to the jobs they’ve had in the past.
By the back half of 2021, the U.S. economy will likely be operating above its maximum sustainable level. This in turn will put upward pressure on inflation. Already, prices are moving higher — much higher in some segments of the economy. Fuel prices are up. Some commodity prices are approaching all-time highs. Supply chains are constrained. Transportation costs have been up for much of the last year. Ports are overloaded, and border crossings have also seen delays. Prices will likely remain elevated through most of the year. The Federal Reserve has made it clear that they are willing to tolerate, and even welcome, inflation rates higher than their traditional targets.
Increase in market demand
While Europe will see slower rates of growth in 2021, that will not be universally felt. Countries like the Netherlands and Germany are leading the recovery. Both countries will continue to benefit from exports to markets where demand remains strong. Manufacturers in the Netherlands, Germany and Austria are also reporting higher input costs. In some instances, firms are passing these prices on as market demand improves.
Inventories remain tight in nearly every market. The stock of raw materials and semi-manufactured goods continues to decline. At the same time, firms have raised their purchase orders. There is a growing imbalance between the strength of new orders and inventory levels. Already, semiconductor chip shortages have been widely reported. Shortages could materialize for other inputs as well. Lead times are deteriorating. There have been delays and difficulties in sourcing inputs. At first this was driven by transportation challenges related to Covid-19. Now, it’s been driven by strong demand and tight supply. Both have pushed prices higher, and prices are likely to stay elevated for the foreseeable future.
European economic outlook
Growth in the fourth quarter was revised down slightly. GDP for the European Union fell 0.5 percent during the quarter and 0.7 percent for the Euro area compared to the third quarter. For the year, GDP in the euro area fell 6.6 percent and GDP fell 6.2 percent for the European Union. Compared to the United States, GDP increased 1 percent compared to the prior quarter and decreased 2.4 percent compared to 4Q19.
The French Prime Minister announced a third lockdown for the regions most impacted by Covid-19. These regions represent about 40 percent of France’s GDP. This third lockdown closes nonessential stores and restricts travel. As a result, growth in France will be close to zero in the first quarter, roughly 5 percent below pre-pandemic levels. The lockdowns will also spill into the second quarter, impacting growth there as well.
Elsewhere in Europe, the outlook is improving somewhat. The economy is still expected to shrink in the first quarter and remain muted through much of 2021. Some countries, like the Netherlands and Germany, are closer to their prepandemic levels and on more solid footing. These countries tend to export more than countries like Italy and Spain that rely on inbound travelers.
The eurozone has had a rocky start to the year. While the recovery will resume in the second quarter, it will differ across countries.
The unemployment rate remained steady in January. In the European Union, unemployment remained at 7.3 percent, up from 6.6 percent in January 2020. In the euro area, unemployment was 8.1 percent, up from 7.4 percent in January 2020. Short-time work programs continue to secure employment and prevent much higher unemployment numbers. In Germany, some 2.39 million employees were on shortened working hours during December. The jobs recovery in Europe will be uneven. In Germany, unemployment is 4.6 percent. In the Netherlands it is 3.6 percent. On the other hand, in Spain unemployment is 16 percent.
Manufactures’ sentiment (PMI)
The Eurozone manufacturing sector continues to lead the recovery. The Eurozone’s manufacturing PMI increased to 57.9 in February. This is the highest level in three years. Manufacturers remain optimistic and the industry continues to expand. According to IHS Markit, manufacturing again dominated the output growth rankings in February, with the top six sectors all goods producing sectors. Machinery and equipment (38-month high), technology equipment (33-month high) and automobiles and auto parts (two-month high) registered the strongest growth. The headline eurozone manufacturing PMI was driven by strong output and new orders. These are being driven by the strongest rise in new export trade since January 2018. Delivery times for inputs are getting longer. February showed the second greatest deterioration in lead times since data was available 24 years ago.
E.U. end markets for electronics
Manufacturing output increased in the first month of the new year, rising 0.7 percent from December 2020. This January’s output was just 0.3 percent below January 2020’s output.
Computer, electronic, and optical products: The electronics industry, which includes categories such as components, loaded boards, computers, communications equipment, and consumer electronics, was essentially flat in January, declining 0.2 percent from December. The sector is now up 19.7 percent from last year.
Motor vehicles: The motor vehicle manufacturing production index declined 11 percent in January. Auto production in the European Union is off 16.6 percent from a year ago.
Air, spacecraft and related machinery: The air and spacecraft manufacturing sector continues to struggle. Not surprising given the collapse in air travel. But production did increase in January, rising 2.6 percent from December. The sector remains down significantly, off 22 percent from last year. The category is looking at a prolonged recovery.
The full IPC report includes more information on the American economic growth, including employment rates and the development of the end markets for electronics.
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