Global Macro: It’s not all about the vaccines –

On Tuesday we gave an update on the race to vaccinate citizens, and we concluded that the UK and the US continue to significantly outpace the EU in their vaccination drive, but that the pace in the EU should pick up significantly from next month, with supply of vaccine doses set to double.

This is coming too late to prevent a third wave of the pandemic that is now hitting many eurozone countries, which is essentially a reverberation of the wave that hit the UK early this year (driven by the same, more transmissible variant of covid-19, B.1.1.7). As a result, restrictions are being tightened in some eurozone countries, just as the UK is on the cusp of loosening restrictions.

US winning the recovery race… – In the US, a combination of much looser restrictions to begin with, a rapid vaccine roll-out, and huge fiscal support (with more in the pipeline) is driving a sharp recovery in economic activity.

As of the latest national accounts data, consumption in January was already back at 98% of pre-pandemic levels, and the Google mobility data shows that the further easing of restrictions has meant that visits to retail and recreation establishments are at over 90% of their pre-pandemic level – the highest seen since before the first lockdowns were imposed over a year ago.

As a result of the rapid recovery, we expect GDP to return to its pre-pandemic level already by Q2 this year, and that sharp rises in government spending will see the economy returning to its pre-pandemic path – and the output gap closing – by early next year.

…with the UK and eurozone jostling behind – The contrast with the eurozone and the UK outlooks is stark. Indeed, despite a vaccine rollout that has been even more impressively fast than in the US, the UK economy will take much longer to return to its pre-pandemic level, and the recovery path is remarkably similar to that of the eurozone.

This is due to two factors: 1) a much weaker starting point, with the strictest and most prolonged lockdowns of any major advanced economy (see figure below), and 2) a very cautious reopening plan, seemingly driven by a desire to avoid past policy mistakes, and in particular the premature easing of restrictions last December.

Restrictions in the UK are set to begin easing in earnest on 12 April, when non-essential shops and outdoor hospitality will be allowed to reopen. On 17 May indoor hospitality will be allowed to resume, and 5 weeks later on 21 June, all legal limits on social contact will be removed. This compares with our base case for the eurozone, which sees non-essential shops reopening in June, and hospitality reopening in July.

While the reopening in the eurozone is indeed later, the eurozone has not (in aggregate) been under as strict a lockdown as in the UK. In many countries, non-essential shops have remained open or have (partially) reopened.

This is reflected in the both the lockdown stringency index – which has been more than 10 points higher in the UK than the eurozone weighted average since the start of 2021 – and the Google mobility data, which shows visits to retail and recreation establishments at 40-50% below pre-pandemic levels in the eurozone, while in the UK such visits have been 50-60% lower.

The net effect of all of this is that both the UK and eurozone GDP are expected to return to their pre-pandemic level only in Q2/Q3 2022 – a year later than in the US, with a negative output gap persisting beyond our forecast horizon.

While restrictions are being tightened in some countries in response to the renewed surge in cases, meanwhile, this is something we had already incorporated into our below consensus growth forecast for the eurozone, which remains at 3.3% for 2021 (consensus: 4.2%). Finally, fiscal stimulus in the eurozone and the UK is set to fall well short of what has been announced in the US.