Euro Area Will Outpace U.S. Economy Over The Next Two Years - Goldman Sachs Says

The eurozone will grow at a faster clip than the U.S. economy in the next two years, analysts at Goldman Sachs have predicted, primarily due to a difference in government policy.

The investment bank expects the 19-member euro region to grow at a pace of 4.4% this year, compared to a rate of 3.5% for the United States. Looking at 2023, Goldman foresees the eurozone growing by 2.5% and the U.S. by 2.2%.

“The hit is more manageable than last year,” he said, regarding the impact of recent Covid-19 restrictions on the eurozone economy.

Thus far, European countries have not embarked on widespread lockdown rules despite the new omicron variant discovered in late 2021. This has prevented any deeper economic shocks in the first few weeks of 2022.

In addition, European fiscal policy is likely to remain accommodative this year, in contrast to what some economists predict for the United States, Stehn said. He added that the eurozone “stands out” in this area.

Euro zone governments are expected to invest large sums of money in the coming years, after agreeing in 2020 to tap the markets in search of 750 billion euros ($849 billion). The disbursements of these funds to a large number of EU nations began in late 2021 and will continue to be released throughout 2022, if key reforms are implemented.

However, across the Atlantic, there are doubts whether President Joe Biden’s “Build Back Better” will become a reality. The legislation could mean an investment of $1.8 trillion, but differences among lawmakers pose a threat to the whole plan.

“After negotiations on the Build Back Better Act stalled late last year, the outlook for fiscal legislation is particularly unclear,” Goldman Sachs analysts said in a note on Monday.



ECB also supportive
The brighter prospects for European growth are also supported by monetary policy. The European Central Bank is expected to keep some degree of monetary stimulus this year, though its pandemic-related bond-buying program is coming to an end.

“Growth really needs to slow in the U.S. to ultimately get inflation back down to something like 2%,” Jan Hatzius, chief economist at Goldman Sachs, told CNBC’s Julianna Tatelbaum on Monday.

He added that “while inflation has gone up [in the euro zone], it has not gone up as much as in the U.S.” Hence policymakers in Europe are “more comfortable” with continued monetary stimulus.

Inflation has been rising significantly in recent months, both in the U.S. and in the euro area. U.S. data released in December showed the cost of living rising 6.8% in the 12 months to November — the highest increase since June 1982. A new U.S. inflation reading is due Wednesday.

Meanwhile, the latest numbers in the eurozone showed inflation at a new record high in December. Preliminary data showed headline inflation at 5% for the month. Given higher inflation, market players are considering how companies will deal with the issue and how it might impact their earnings.

Speaking to CNBC Tuesday, Sharon Bell, managing director of European equity strategy at Goldman Sachs, said the Euro Stoxx 600 is likely to see lower returns than in 2021, but they would still be “pretty good.” “We actually have 6% earnings growth for European companies, so slightly beating that inflation figure,” she said.

SOURCE: CNBC
IMAGE SOURCE: PIXABAY