The global recovery from the COVID-19 pandemic is well under way, with global GDP outperforming consensus forecasts in 2020 Q2 through to 2021 Q1. With several highly effective vaccines being deployed across a wide set of countries, the world is well on the path out of this crisis.
Fathom’s latest macroeconomic model, the Centrality Tracker, is built on the premise that there are three major economic hubs — the US, EU and China — and that economic outcomes for other countries (hereafter referred to as ‘spoke economies’) are largely determined by growth outcomes in these hubs. Most mainstream macro models fail to take full account of hub-to-spoke spillovers in GDP growth, but the Centrality Tracker accurately quantifies the magnitude of these spillovers. In the remainder of this piece, we discuss the economic outlook for each of the major hubs and ask which of the hubs is currently faring best.
The number of cases sharply fell in the US and Europe after the second wave of COVID-19 infections towards the end of 2020. Weekly new infections are elevated compared to other advanced economies, but have been relatively flat since March with an implied R value around 1. In comparison, China has been reporting close to zero new cases.
However, the US is ahead of the EU and China on vaccines administered. The US vaccination programme is on track to have offered at least an initial dose of a vaccine to the adult population by the end of Q2 2021, in line with stated objectives by the Biden administration. The European Union, by contrast, has borne the brunt of vaccine production shortfalls, and lags the US by about one quarter. China is currently behind, but its vaccination programme has picked up pace and has been administering an average of 4.5 million doses per day since 29 March. At this rate, China will have administered at least a single dose to its 1.4 billion population by the end of the year.
So, while the US and Europe have persistent new cases of infections, the US is more likely to avoid a third wave this year thanks to its faster rollout of vaccines. The EU vaccination programme is also more likely to be held back by high levels of vaccine hesitancy among its population. A recent YouGov poll suggests that only 45% of the French would be willing to take a vaccine, raising the prospect of a two-speed health recovery. China, with zero reported cases and a proven willingness to act swiftly to impose strict restrictions to contain signs of resurgence of the virus, appears in a good position, but remains at risk until a larger share of the population is vaccinated.
The US governments has also provided more fiscal support through the crisis than the other global hubs. The Fathom Macroeconomic Policy Indicator (FMPI) shows the impact of macro policy on the output gap, with a more positive value representing looser policy. Since the start of the crisis the US government’s fiscal responses have been amongst the most generous globally, particularly in cash handouts as opposed to loan guarantees. The chart above also excludes the US fiscal package introduced by President Biden earlier this year. Fiscal measures have boosted household and corporate incomes, which have barely fallen in aggregate and have even increased in some cases. As restrictions are removed, the household savings that have built up during lockdown are likely to be unleashed, boosting post-COVID aggregate demand. Fathom estimates that, in the first quarter of this year, the euro area was holding 2-3% of annual GDP as excess savings, with the US holding 6-8%.
Fathom’s forecast for GDP growth in each of the hubs is shown in the chart above. The recovery in the US, with the expected boost from fiscal support and the rapid rollout of vaccines, happens earlier than the EU. The EU is facing the impact of further and longer restrictions whilst the vaccine rollout stagnates. Using Fathom’s Centrality Tracker, ‘spoke’ countries with closer relationships with the US are boosted by spill-over effects earlier, with country groups closest to the EU getting a spill-over boost a quarter later.
China, meanwhile, has already recovered its lost output from the pandemic, and is expected to continue growing roughly in line with our pre-COVID expectations. China is set to benefit from external tailwinds from the US and EU, as well as favourable base effects which are sufficient for China to achieve its 6% GDP target for 2021 without additional sequential quarterly growth this year.
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