Economic recovery: US and Europe at the crossroads

The scenario of a “V” recovery, that is, of a rapid recovery of the world economy after the sharp drop due to the Covid crisis, was definitively closed after the words of Jerome Powell, the Chair of the Federal Reserve, during the meeting of the past few days. Analysts’ forecasts are for a sharp drop in GDP in the first half of the year, followed by a gradual, slow and uncertain recovery that markets are beginning to price now.

economic recovery us europe

The slow economic recovery is the prevailing hypothesis, indeed there is a risk of an “L” scenario, with uncertainty about the evolution of the Covid pandemic which slows down the recovery of domestic demand much. This is despite the support of governments and central banks. Even more dangerous would be the “W” profile of which the OECD spoke last week, that is to say a new wave of infections in the autumn / winter, which would force massive containment measures, causing another strong contraction of the ‘activities.

What is the Federal Reserve doing to help economic recovery?

The Fed’s primary goal is to bring the unemployment rate down as quickly as possible to avoid permanent damage to the labor market. The unemployment rate, which is expected to stabilize at 9.3% at the end of 2020, will remain high at least until 2022. Interest rates will therefore remain zero until unemployment returns to near pre-crisis levels, approximately around 4 %.

In addition, to avoid the bankruptcy of substantially sound businesses, the US central bank will continue its massive program of buying bonds and offering liquidity to the banking sector.

The effects of Fed actions on the European economy

The Fed has sanctioned what many economists have said since April: global activity will slowly resume. European stock exchanges, like those of the rest of the world, suffered a faster recovery and reacted negatively.

The prospect of low US rates for a longer period of time than expected could support the euro, which has strengthened in recent days thanks also to the positive developments in the recovery plan of the European Commission. A lasting strengthening of the euro, however, needs good news on the contagion front and on the speed of recovery of activities.

Macro data to monitor

We must not lose sight of data on infection. Covid-19 cases have recovered in some US states, which could lead to new restrictive measures.

Secondly, labor market data are fundamental. The rebound in employment in May was hailed by the markets as a very positive surprise. We need to be cautious, given the volatility of the data and the long journey, however, necessary to return to the pre-crisis levels of employment.

Finally, in the coming months, polls relating to the presidential elections in November will become increasingly relevant for the markets.

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