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Q1 GDP: Widening Gap Between EU and US?

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It is widely anticipated that the EU area would register negative growth during the first quarter. That would put the shared economy officially back into a recession, though technically. The remaining question for tomorrow’s data release is how negative the result will be.

For currency traders, there is another dimension: How good the US’ GDP figure will be as it has gone through the process of reopening during the last couple of months.

Additionally, the US has significantly ramped up stimulus spending in the last four months. This is likely to support additional growth.

Riding the gap

Traditionally, higher economic growth in one country would imply its currency would strengthen with respect to another with less growth.

However, the US has significantly outspent the European Union, with over a 40% increase in the monetary base. The concerns of inflation eroding the value of the currency are not as pronounced.

As Europe ramps up its own vaccination efforts, Q1 might show the broadest gap between the two largest economies in the world. This means that even though the numbers might show a significant distance, the markets could counterintuitively move in the opposite direction.

This suggests that they would absorb the expectations of the EU catching up with the US over the course of the second quarter.

In terms of parsing the data, it’s important to remember that the US reports annualized data. On the other hand, the EU reports just for the quarter in question.

The US uses a sophisticated calculation to project how much the growth experienced during the quarter would be if it were annual. To compare the two figures, typically it’s reasonably accurate to simply divide the US’ figure in four.

This might help explain why the US figures immediately appear so much better than the EU’s

What we are looking for

The US reports its Q1 data later today. They expect to show annualized growth of 6.5%, an increase of the pace from 4.3% recorded in the fourth quarter.

To make this comparison, these figures imply quarterly growth in the order of 1.6% compared to 1.1% in the prior quarter.

There might be some extra volatility around the release, as there are several other major data points being released at the time, including employment figures.

Across the pond

The EU reports their Q1 date tomorrow. Generally, the market reacts to the report of German GDP first. It usually sets the tone for the continental figure.

German quarterly GDP is projected to come in at -1.5%. This is compared to 0.3% reported in the first quarter. The largest economy in Europe, therefore, isn’t expected to fall into recession.

Not so for the shared economy, which is projected to show quarterly GDP growth of -0.8% compared to -0.7% in the prior quarter.

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