Economic recovery from pandemic expected to be slower in Europe than US or China

THE INTERNATIONAL MONETARY Fund has said that the eurozone economy would expand faster than previously expected in 2021, but Europe will be slower than the US to recover from the pandemic shock.

In its latest outlook for the world economy, the IMF said gross domestic product in the 19 countries that use the euro would grow by 4.4 percent this year.

This figure was up by 0.2 percentage points from a forecast in January, but trailed the institution’s new prediction for the US, where GDP growth is now expected to hit 6.4 percent, a big revision upwards of 1.3 percent.

The IMF’s outlook for Europe was much lower than it had anticipated six months ago before the second and third waves of Covid-19 cases brought a fresh round of restrictions and disruptions.

While the Chinese economy already returned to pre-pandemic health last year and the United States is expected to do so this year, Europe will not do so until mid-2022, the IMF said.

The IMF said the gaps with the US could be attributed to multiple factors, including different responses to the pandemic, with Europe resorting to far tougher restrictions.

IMF chief economist Gita Gopinath said the slow rollout of vaccinations was also one of the bloc’s “biggest challenges” and that this has left Europe “a couple of months” behind the US.

Also to blame, the body said, were “pre-existing trends, and structural rigidities predating the crisis,” with Europe’s economy being seen as less adaptable than that of the US.

“In the United States, the first shock in 2020 was smaller and the 2021 rebound was greater. There were no second or third wave confinements either, so the economic impact was weaker,” said Charlotte de Montpellier of ING bank.

Economists also point to a more feeble response in Europe to fighting the recession than what has been delivered in the US, especially under the new Biden administration.

The EU is still struggling to implement a €750 billion euro ($885 billion) stimulus plan that would be added to individual national rescues that were unveiled last year.

It was agreed in July, ratified in December, but still needs a final sign off from the 27 EU member states, which might be delayed even further after a court decision in Germany.

“I see that the American cavalry is arriving on time,” French Finance Minister Bruno Le Maire said last week. “I wish the European cavalry would also arrive on time.”

The IMF said that the ambition of the US response was so great, including a $1.9 trillion stimulus as well as an infrastructure plan, that “spillover” effects to Europe and other trading partners were to be expected.

“The Americans are handing out money immediately to consumers: $1,400 dollars per person, or $5,600 for a family, which is considerable,” said Philippe Waechter, director of economic research at Ostrum Asset Management.

Waechter acknowledged that Europe has cushioned the shock of the pandemic with short-time working measures that have saved jobs, “but at no time has there been any momentum created by economic policy.”

Gopinath told reporters that governments must be mindful of rising debt and deficits, and use a “tailored approach which is specific to where they are in terms of the speed of their recovery.”

Because the pandemic “has gone on for much longer than one might have expected” governments should target their scarce resources.

In order to capture more revenues for their coffers, the IMF is “very much in favor of a global minimum corporate tax,” Gopinath said.

A day after US Treasury Secretary Janet Yellen called on G20 countries to adopt a minimum tax, Gopinath noted the “large amount” of tax avoidance with “countries sending money to tax havens.”

“That’s reducing the tax base on which governments can collect revenues and do the necessary social and economic spending that’s required,” she said. “It is a big concern of ours.”

G20 finance ministers are expected to discuss the issue when they meet, virtually, on Wednesday.