April Economic Update: Bigger things than the Suez ship are still firmly stuck in the mud

One of the main themes in the global economy is the growing divergence between the US and the eurozone. Or as Eurosceptics would say, the growing divergence between the eurozone and the rest of the developed world.

While the US economy is powering ahead, boosted by the Biden stimulus and a much faster vaccination campaign, the eurozone economy once again sees almost everything that could go wrong go wrong. In this regard, the sight of tugboats trying to unstick the containership Ever Given in the Suez Canal is to some extent a metaphor for the difficulty in getting the eurozone recovery on a sustainable course.

A third wave of the pandemic has pushed several eurozone countries to tighten lockdown measures again or to extend them, jeopardising a reopening of the economy in April. Exponential growth of the vaccination pace is still possible after Easter but currently looks too good to be true. And as if things couldn’t get any worse, the fact that the temporary blockage of the Suez Canal will mainly hit Asia and Europe but not the US, adds to the eurozone’s problems. Not to mention the fact that the German Constitutional Court is once again leaving its mark on European crisis tools, having asked German President Frank-Walter Steinmeier to stop the ratification of the flagship symbol of last year’s European solidarity, the European Recovery Fund. The balance of economic recovery is currently clearly tilted to the US, with all potential effects on bond yields and currencies.

However, there is at least another global theme which will hit the entire developed world and not only Europe: the increase in production costs on the back of rising container and shipping costs, shortages in the delivery of semiconductors and raw materials. These higher production costs will no doubt also find their way into consumer price inflation in the coming months.

Therefore, even if central banks manage to convince financial markets that they will be looking through higher inflation numbers and will not react with any premature monetary policy tightening, this conviction might be put to the test in the coming months.

Even if the short-term economic outlook is still highly determined by lockdowns, relief and vaccinations, we try to look ahead with some articles in this Monthly Economic Update, investigating the potential consequences of the pandemic for cohesion in the eurozone and the greening of monetary policy across the world. The latter is at least one area in which the eurozone is currently leading.

All in all, growing divergence will remain a significant theme in the short run. It will take until the summer and will require the absence of any fourth and fifth wave of the virus for the eurozone to bounce back, allowing developed economies globally to stage a synchronised recovery.