High-frequency indicators in the United States point to strong demand for goods and services so far in the second quarter, in line with our expectations for a quarterly growth rate that could approach double-digits and be the strongest this year. Vaccine distribution remains on a trajectory to cover about 65% of the population by the end of June, allowing for a substantial reopening of the economy more broadly. US real GDP increased at a seasonally adjusted annual rate of 6.4% in the first quarter.
GDP in the euro area declined by 0.6% in the first quarter compared with the preceding quarter, marking an official double-dip recession after a 0.7% contraction in the final three month period of 2020. But more recent data alongside generally stronger sentiment indicates the economy is likely growing again. We expect growth around 4% for all of 2021, as several countries have announced steps for easing Covid-19 restrictions and for GDP to reach its pre-pandemic level in the first half of 2022.
In the United Kingdom, GDP declined by a less than-expected 1.5% in the first quarter of 2021 compared with the previous three-month period, with the monthly estimate for March, at 2.1%, showing the fastest monthly rate of growth since August 2020. The UK economy was hit harder than the euro area earlier in the pandemic but has since realised a more successful vaccine rollout. As a result, we expect its growth trajectory to overtake that of the euro area later this year. Given encouraging developments around virus transmissions, we now see the UK economy growing in a range of 6.5% to 7% for all of 2021 – a stronger pace than our previous forecast of around 6%. We also expect GDP to reach its pre-pandemic level around the turn of the year, a few months before the euro area reaches that milestone.
The US Federal Open Market Committee voted on 28 April to leave the target range for its federal funds rate unchanged at 0%–0.25% and its bond-buying programme unchanged. Chairman Jerome Powell emphasised that it remained premature to discuss a tightening in policy and that the Fed would communicate potential changes to its $120 billion-per-month bond-buying programme well in advance of any tapering of purchases. We expect such guidance to ramp up in the second half of the year, but we don’t foresee the Fed raising its interest rate target until the third quarter of 2023.
The European Central Bank (ECB) left its key rates intact at its 22 April policy meeting, holding its main deposit rate unchanged at a negative 0.5%. The ECB reiterated that it would continue asset purchases under its Pandemic Emergency Purchase Programme (PEPP) at least through March 2022 and that purchases for the remainder of the second quarter would “be conducted at a significantly higher pace than during the first months of the year.” ECB President Christine Lagarde said discussion on the phasing out of PEPP purchases was “simply premature”. We nonetheless expect the ECB to gradually slow its bond purchases starting in the third quarter of 2021 as economic activity picks up.
The ECB’s caution is in marked contrast with the Bank of England’s acknowledgment that it would slow the pace of its asset purchases for the rest of the year. At its 6 May Monetary Policy Committee meeting, the Bank of England maintained its bank rate at 0.1% and left its target for government bond purchases unchanged at £875 billion but signalled that it would slow the pace of its purchases from £4.4 billion a week to £3.4 billion a week. The bank also increased its forecast for 2021 UK GDP to 7.25%.
The Consumer Price Index (CPI) in the United States rose by a greater-than-expected 0.8% in April on a seasonally adjusted basis compared with March. Sharply higher prices for airline tickets and used cars reflected both a recovery driven rebound in activity and the near-term challenge of supply not keeping up with emerging demand. Headline inflation was up 4.2% compared with a year earlier, also greater than expected. Core CPI, which excludes volatile food and energy prices, rose by 3.0% compared with April 2020. We expect headline CPI to hover around 3% for the rest of 2021 before dropping back toward 2% for most of 2022, with core CPI falling back below 2% in the second half of 2021 before rising marginally above 2% toward the second half of 2022 and into 2023.
Headline inflation rose to 1.6% in the euro area in April on an annual basis, up from 1.3% in March. Energy prices, up 10.4% compared with April 2020, accounted for the bulk of the gain. Core inflation, which excludes volatile food and energy prices, was estimated to have risen by 0.7% compared with a year earlier. We expect higher relative energy prices to push headline inflation above 2% in the second half of the year and core inflation to gradually rise to a range of 1% to 1.5% as the pace of economic recovery quickens. Underlying price pressures, though, remain subdued amid weak labour bargaining power and low inflation expectations.
Headline inflation rose by 1.5% in April in the United Kingdom compared with a year earlier, following a 0.7% rise in March. Utility, clothing, and motor fuel prices made the greatest contribution to the gains. We expect headline inflation to rise above the Bank of England’s 2% target in the second half of the year on higher relative energy prices amid a strengthening economy. We expect core inflation, which excludes volatile food and energy prices, to approach the BOE’s target.
The unemployment rate in the United States rose to 6.1% in April as only 266,000 non-farm jobs were created, far below expectations for more than a million. We expect a high degree of variability in jobs numbers in the coming months as a labour market that turned off all at once wrestles with how to turn itself back on. We do expect factors keeping some workers side-lined to dissipate over the next several months.
Unemployment in the euro area fell to 8.1% in March from a revised 8.2% in February on a seasonally adjusted basis, with furlough schemes continuing to support employment. The unemployment rate was 7.1% in March 2020, near where it was at the start of the Covid-19 pandemic.
The unemployment rate in the United Kingdom fell to 4.8% in the three months to March and, down slightly from 4.9% in the quarter ended in February and the third straight three month period with a decline. We expects employment to be supported by the extension of the Coronavirus Job Retention Scheme through September as part of the UK’s recently announced budget.