Chart of the week: Up, up and up - the US gap that matters for the world

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● Almost a party: US consumers are opening their wallets like rarely ever before. They have the means to do so. Their balance sheets were in good health prior to the pandemic already. Following unprecedented government transfers that raised US real disposable incomes by 5.8% last year despite a plunge in employment, new stimulus cheques sent to most US households since January have boosted the spending power of consumers further. As the US economy continued to reopen in March, US retail sales surged to a whopping 14.4% above their pre-pandemic level in real terms.

● The US example: Amid rapid US vaccination progress, most US states eased COVID-19 restrictions earlier than European countries. Although the Eurozone did not dish out money to households as freely as the US, and instead simply kept real disposable incomes roughly constant last year, the US experience bodes well for Europe. It suits our long-held call: given the chance to spend, consumers will do so as the pandemic fades. The rebound from the COVID-19 recession will be different; it should be much faster than the recovery from a standard recession, let alone from a financial crisis such as the one of 2008/09, which required a lengthy period of balance sheet repair before animal spirits could take over again.

● Mind the gap: Amid surging sales of goods, a gap has opened up between how much physical or online shops are selling and how many goods factories are churning out – see chart. The pronounced gap between the production and the sale of goods to consumers supports two conclusions. 1) Sales of goods to other companies (machine tools and intermediate goods) are still lagging behind sales to consumers; although US non-residential investment has already recovered significantly, we expect US investment to strengthen further. 2) Shops and/or factories need to replenish inventories. These factors can underpin further significant gains in production even if retail sales growth moderates. In addition, imports will help to fill the gap, especially once shipping and distribution bottlenecks on the US West Coast have eased.

● A similar but far less pronounced pattern: From May 2020 to February 2021, Eurozone retail sales fell 0.6% short of their pre-pandemic level of January and February 2020, versus a decline of 5.8% in manufacturing output. Even in the Eurozone, shops have sold more goods in-store or online than factories have produced. Inventories need to be replenished, while businesses look set to raise their investment. In addition, supply bottlenecks such as those for semiconductors and microchips, which are holding back production on both sides of the Atlantic, are likely to be overcome in time. That bodes well for the outlook for production.

● Global impact: Buoyant demand from the US and China will support the recovery from the COVID-19 recession well beyond their own shores. On top of the direct impact as the US and China suck in more imports, their rapid rebound is lifting sentiment around much of the globe. This will encourage business investment. As a major producer and exporter of machine tools and other investment goods, the Eurozone stands to benefit significantly. Backed by record increases in output, new orders and exports, the Eurozone manufacturing PMI surged to 62.5 in March from 57.9 in February. PMIs in export-oriented Germany and the Netherlands even hit record highs – see Eurozone manufacturing: big gains ahead. We expect the Eurozone to get its current wave of the pandemic under control in May. If so, its economy will then join the global upturn that took hold in the US in early 2021 and seems to have spread to the UK in March.

Holger Schmieding

Chief Economist

+44 20 3207 7889

holger.schmieding@berenberg.com

Kallum Pickering

Senior Economist

+44 20 3465 2672

kallum.pickering@berenberg.com

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