Since the start of the Covid-19 pandemic and the introduction of health protection measures, we have been stressing that only a swift and broad vaccination campaigns would allow economies to return to normal. This is what we are now seeing in most European countries.
The credit impulse declined sharply in the eurozone in March 2021, reflecting the fall in the annual growth of loan outstanding, although this resulted from a high base for comparison and was therefore widely expected. Moves by eurozone governments to introduce support measures for companies’ financing led to exceptionally strong growth in bank lending to non-financial corporations from March 2020 onwards.
Eurozone inflation rose markedly in Q1 2021 and seems to be extremely volatile. Core inflation, which is usually stable, has been moving in fits and starts.The rebound in goods prices largely explains the broad increase in inflation. Prices of tradeable services have also picked up, notably in the sectors that were hit hardest by the pandemic, such as transport. The recent acceleration in prices is being driven by temporary factors: changes in VAT rates, higher crude oil prices, and the revision of HICP weights. Inflation could continue to rise over the next few months.These temporary effects should dissipate at the beginning of next year. Thereafter, there seems to be very little risk of an inflationary surge in the Eurozone.
The pandemic continues to spread rapidly within the Eurozone member states, and many uncertainties remain. Yet the most recent economic data are encouraging. Far from claiming victory, these signals nonetheless raise expectations of an accelerated economic recovery as of H2 2021. The greatest hope lies in the successful rollout of vaccination campaigns among national populations. The authorities will remain at the bedside of an ailing Eurozone economy, ready to help through public policies while trying to avoid any tightening moves that might hamper the recovery process. In terms of monetary policy, for example, Christine Lagarde announced that the ECB would step up the pace of securities purchases, which means that financing conditions are being closely monitored.
The resurgence of the Covid-19 pandemic in Europe has led to new health measures in most countries. Given this difficult situation, the eurozone economy sent some signs of improvement over the last three months, compared to the previous quarter...
The financial cycle, as captured by bond and equity market developments is very much globally synchronised, but, at present, there is a business cycle desynchronization between the US and the euro area. Rising euro area government bond yields, on the back of higher US yields, cannot be considered as a sign of economic strength. Quite to the contrary, they come at a bad moment. One would expect, at a minimum, a very strong statement from the ECB’s Governing Council on 11 March on its decisiveness to act should yields continue to rise. Markets would of course prefer immediate action. After all, the tool –the PEPP- is available so one might as well step up its use.
Recently, several calls have been made for the ECB to cancel part of its government debt holdings. Such an operation would violate the EU Treaty. On economic grounds, it is unnecessary, given that the interest paid on the debt to the ECB flows back to governments in the form of dividends. It would actually entail a cost: higher inflation expectations and/or a higher inflation risk premium would cause an increase in bond yields. The extreme nature of the measure could also undermine confidence. In reality, the very low levels of interest rates imply that governments have a lot of time to bring their finances in better shape
A robust and lasting normalisation of the economic situation will depend on gaining full control over the Covid-19 pandemic and on the renewed confidence of economic agents. Yet the Eurozone economy is struggling to recover in the midst of persistent lockdown measures and health restrictions. After a robust economic rebound in late spring 2020, the recovery phase has virtually levelled off thereafter.
The preliminary estimation for euro area inflation surprised to the upside, with annual core inflation reaching 1.4% in January. Monthly inflation was negative however, at -0.5%. Due to the Covid-19 pandemic, inflation data have become very noisy and hence more difficult to interpret. Survey data show rising input prices and lengthening of delivery times, which could exert some upward pressure on inflation. These factors should dissipate during the course of the year. Given the economic slack, any lasting pick-up in inflation should be a very gradual process.
In the past, bank lending to companies and GDP have tended to move in unison, but with the Covid-19 crisis, these movements have become uncoupled in the eurozone. At a time when GDP growth has been contracting on a year-on-year basis – with a sharp contraction in Q2 2020 due to lockdown measures followed by an easing trend in Q3 after restrictions were lifted and a quarterly rebound – bank lending to the private sector has accelerated rapidly (+6.9% year-on-year in November 2020), buoyed by government measures to support corporate financing, like PGE state-backed loans in France, and the banks’ strong implication in lending.
In Europe, the Covid-19 crisis is far from over. Since the beginning of 2021, many EU member states have had to introduce new restrictions to try to curb the pandemic. Germany, Ireland and Portugal, for example, are still in lockdown, while several other countries, like France, Italy and Spain, have implemented curfews. Restrictions have been reintroduced just as vaccination campaigns are beginning to be rolled out in Europe and around the globe. Although vaccinations are our biggest source of hope, it will probably take considerable time to reach herd immunity...
In force since 30 October 2019, tiering seeks to limit the cost of negative interest rates (-0.5%) for eurozone banks by excluding part of excess reserves from the charge[1]. This approach saved eurozone banks a charge of EUR 4.3 billion in December 2020, leaving a residual charge of EUR 9.8 billion. The cost of negative interest rates has nevertheless grown steadily since April 2020, and particularly in the second quarter of 2020, due to sharp increases in excess reserves. These increases result in part from the expansion of outstanding Targeted Longer-Term Refinancing Operations (TLTRO III), the terms of which were temporarily relaxed (from June 2020 to June 2021) in response to the Covid-19 pandemic
The resurgence of the Covid-19 pandemic halted the Eurozone’s economic recovery. It looks like year-end 2020 will be harder than expected due to new social distancing measures and lockdown restrictions set up in most of the member states. Industrial output remains low compared to pre-crisis levels and companies in the tradeable services sector continue to be at the forefront of restrictions. As to the first half of 2021, uncertainty is still high. Faced with this environment, the European Central Bank (ECB) is expected to announce new monetary stimulus measures following its 10 December meeting as fiscal support measures are gradually reduced.
The resurging pandemic and tighter sanitary restrictions in many Eurozone countries pose a new threat to the economic recovery after the first wave of virus was generally brought under control. The latest economic indicators for the Eurozone suggest that economic momentum is slowing. However, there has not been a collapse like the one observed in late March and April...
The Covid-19 pandemic has caused a decline in inflation and, in most euro area countries, an increase in the inflation dispersion between sectors. It will take considerable time until activity has been restored sufficiently to generate labour market bottlenecks, which –in the absence of exogenous shocks- are a necessary condition to see a broad-based and lasting increase in inflation. This suggests that for the coming years, we should expect inflation to fluctuate around a slowly rising trend. In the course of 2021, the unleashing of pent-up demand –under the assumption that a vaccine is sufficiently widely deployed- could cause a temporary pick-up in inflation. In this respect, a decline in the price elasticity of demand will play a key role.
The Eurozone’s macroeconomic environment remains highly uncertain in the midst of a resurgence of the pandemic in most of the member states. New health restrictions, though generally less severe than in the first wave of the Covid-19 pandemic, constitute another drag on the region’s economic recovery and catching-up dynamics...
The Q3 2020 rebound in the Eurozone GDP growth was stronger than expected: 12.7% q/q, compared to expectations of 10.5%. Of the region’s four biggest economies, France reported the strongest rebound followed by Spain, Italy and Germany. This rebound only partially erased the massive negative shock earlier this year. In Germany, France and Italy, GDP was still about 4% below the Q4 2019 level, while Spanish was still down by 9%. All components of demand contributed to French GDP growth. Sector differences reveal the heterogeneous impact of the shock. In all four countries, the rebound was largely mechanical, but other factors also came into play. Emergency measures to offset the impact of the lockdown last spring constituted a strong support
Despite a significant and higher than expected rebound in the third quarter (+12.7% q/q according to Eurostat, from -11.8% in Q2), the y/y contraction in GDP remains significant albeit lower (-4.3%, from -14.8% in Q2). In contrast to prevailing macroeconomic trends, credit impulse (defined as the annual change of the annual growth rate of bank loans) to the private sector increased very slightly in September 2020, following a decline from 1.9% in May 2020 to 0.8% in August 2020...
The Covid-19 health crisis is an historic shock for the eurozone economy. The economic policy response has been substantial and rapid, and this is particularly true for the monetary policy adopted by the European Central Bank (ECB). The ECB has notably introduced an emergency asset purchasing programme, the Pandemic Emergency Purchase Programme, or PEPP. In June, its envelope has been increased to the current level of EUR 1,350 billion. Thus, since March 2020, monetary policy has had a significant effect on long-term interest rates, improving financing conditions for eurozone member states and also for the private sector
The economic position improved significantly over the last three months compared to the three months prior. The recovery in the euro zone seems to have stalled...
After a more vigorous than expected recovery following the end of lockdown, the trend now seems less energetic. There is still lost ground to make up and the end of the year, beset by uncertainty on the health and economic fronts, is likely to see a marked decline of growth. In our central scenario, there is no return to pre-crisis GDP level before the forecast horizon at the end of 2021. Coupled with this, deflationary pressures are building, and the strengthening of the euro intensifies this dynamic. So far the European Central Bank has been patient, but has indicated its willingness to take new measures. If the current situation persists, an extension of emergency monetary measures, in terms of both size and duration, looks likely.
The outcome of the ECB meeting was eagerly awaited considering the latest inflation data, the strengthening of the euro and the Federal Reserve’s new strategy of targeting average inflation. The implicit message from the ECB President’s press conference was “be patient” on the three areas of concern. Inflation is projected to pick up whilst staying well below the target, the euro exchange rate is being closely monitored and the sheer number of strategy review workstreams implies it will take quite some time before we learn about the outcome in terms of the inflation objective.
The latest flash PMIs had raised some concern given the weakening of the composite index for the eurozone (from 54.9 to 51.6) and Germany (from 55.3 to 53.7) and an even bigger decline in France (from 57.3 to 51.7).
The Eurozone Purchasing Managers’ indices (PMI) for July were better than expected. This is visible at country level, as the PMIs for France and Germany rose strongly. This improvement is noticeable in the eurozone services sector, which rose to a two-year high (55.1). The manufacturing PMI climbs above the expansionary line for the first time since January 2019. These positive numbers have to be taken with caution. Difficulties on the supply side appear to recede, but problems on the demand side are likely to persist. Consumer behaviour will be a key element for a stronger economic recovery
The bank lending pulse picked up slightly in the Eurozone in May 2020 (+1.9%, after +1.5% in April and +1.7% in March) even as Eurozone GDP is expected to have entered a record-breaking decline in Q2 (-13.5% q/q vs. -3.6% q/q in Q1 2020), as national lockdown measures have a lasting impact on economic activity. Bank lending to the private sector has accelerated rapidly since March (+5.3% in May, after +4.9% in April and +5% in March) after holding at a dynamic but relatively stable annual pace since summer 2018 (+3.5% on average). Lending to non-financial companies continued to grow at a rapid pace in May (+7.4% after +5.5% in March), offsetting the slowdown in household lending (+3%, after +3.4%)
