Financial markets have currently priced fairly benign economic prospects for the United States. This relatively optimistic economic picture shows up in all sorts of measures. For example, the steepness of the yield curve is a popular indicator for nominal growth expectations. The difference between 2-year and 10-year U.S. government bond yields is currently as high as it most recently was in 2015. Inflation expectations have been rising, as have earnings expectations for the stock market. The prices of raw materials also reflect the anticipation of a strong economic recovery. For the United States, economists are in the process of raising their growth expectations for 2021, as can be seen from our "Chart of the Week." For Europe, however, the picture does not look quite as good. After a phase of almost euphoric expectations for 2021 toward the end of last year, the forecasts are being lowered again.
There are several causes for this divergence: One likely reason for the divergence in growth expectations relates to the course of the pandemic. When it comes to vaccinations against Covid-19, the United States has left most European countries far behind. Another reason is fiscal policy: With Democrats setting the policy agenda in Washington, fiscal policy has been even more expansive than expected after last year's presidential elections. With the ink on the president's signature on the 1.9 trillion U.S. dollar stimulus package barely dry, the discussion about another, this time 3 trillion U.S. dollar infrastructure-investment program has already started. In Europe, however, the implementation of the EU reconstruction fund is extremely slow. The latest decision by the German Federal Constitutional Court could cause further delays.
So, what might all this mean for markets going forward? Well, in terms of economic growth, it is sadly foreseeable that continental Europe will once again lag well behind other economies such as the United States or some emerging-market countries, especially in Asia, in this recovery. However, that does not necessarily mean that European stock exchanges are on the verge of collapse. For large European companies, the global economy is ultimately more important than the economic prospects within their respective home countries.
Sources: Bloomberg Finance L.P. and DWS Investment GmbH as of 3/29/21