The euro zone 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 euro zone growing by 2.5% and the U.S. by 2.2%.
Sven Jari Stehn, Goldman’s chief European economist, said that while in the near term the picture in Europe is “challenging,” the region still “has more room to grow.”
Speaking to CNBC Tuesday, he said that there are two main factors supporting European growth.
“The hit is more manageable than last year,” he said, regarding the impact of recent Covid-19 restrictions on the euro zone 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 euro zone “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 for 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 euro zone showed inflation at a new record high in December. Preliminary data showed headline inflation at 5% for the month.