Based on May and June business confidence surveys, the French economy has been rebounding more vigorously than expected from the third lockdown. We have raised our Q2 growth forecast, from near zero to near 1% QoQ. In Q3, the mechanistic rebound would bring growth to about 3% QoQ. Growth is expected to ebb thereafter as the catching-up effects dissipate, although it should remain high, bolstered by the fiscal impulse. The downside of the vigorous upsurge in demand is that it is squeezing the supply side, which is less responsive. The ensuing supply chain constraints, higher input prices and hiring difficulties are all sources of friction that must be monitored since they could hamper the recovery
At the beginning of 2021, the economic growth surprised on the upside. In Q1, real GDP rose by 0.1%. Private consumption declined, reflecting the disappointing evolution of income and a still high propensity to save, investment rose by almost 4%. The recovery turned out to be uneven, with industry and construction seeing a quicker rebound, while services continued to suffer. The economic growth is expected to strengthen in the coming months. The acceleration of the vaccination programme and a significant improvement in the health outlook have boosted optimism among consumers and businesses. In order to make the recovery long lasting, Italy has to improve the quality of human capital to balance the decline in productivity also due to an elderly work force.
Just when the lights seemed to be turning green on the health front, the spread of the Delta variant in Spain, as elsewhere in Europe, is a cause of concern. The risks remain currently under control and economic activity should record a significant upturn this summer. The easing of travel restrictions and the introduction of the European health pass since 25 June should allow the Spanish tourist industry to lift itself back up, which would have positive knock-on effects on consumption and employment. Even so, and despite the fact that growth is expected to bounce back strongly, to 6.0% in 2021, the Covid-19 will continue to leave its mark on Spain’s public finances
The Belgian economy grew at an above-potential rate in the first quarter of this year, and looks to be on course to maintain this pace throughout the year. Full year growth is expected to come in at 5.1%. Private sector sentiment is strong and the labour market is emerging from the health crisis virtually unharmed, with the unemployment rate still hovering at around 5%. Public finances, largely responsible for the current strong situation through extensive support measures, need to be improved over the medium-term, as the government aims to capitalise on the recovery to fix other, more structural issues.
Although Finland was one of the European countries hit the least by the Covid-19 pandemic, its economic recovery was nonetheless pushed back by a third wave of contaminations in late winter 2020 and early spring 2021. The economy will rebound in the second half of this year, buoyed by consumption and the upturn in global trade. GDP growth should range between 2.5% and 3% in 2021 and 2022. Very concerned about the solidity of its public finances, the country saw its public debt swell by about 10 points of GDP last year while the deficit rose to 5.4% of GDP.
The Greek economy is proving resilient, with the recovery through to Q1 2021 being faster than in most other Eurozone members. This has been driven primarily by the very significant increase in goods exports. The spread of the Delta variant in Europe represents a threat to the recovery in the tourism sector, which is essential to bolster growth and employment over the coming months. Pending this, the labour market shows continued fragility. The unemployment rate climbed to 16.3% in Q1, whilst the number of inactive workers jumped, partly due to the effect of rising numbers of workers on temporary unemployment
The labour market should play a crucial role in the recovery through its impact on household income and spending. There are reasons to be hopeful considering that recent business surveys show a further increase in hiring intentions whereas unemployment expectations of households have dropped below their pre-pandemic level. Household intentions to make major purchases over the next 12 months have already increased and this trend should continue on the back of an improved financial situation and reduced income uncertainty.
The Pulse for Italy continues to improve reflecting both a genuine economic rebound and positive base effects arising from the drop-off in activity in H1 2020. Base effects were especially strong in industrial production and retail sales, which in April were still below the year-end 2019 levels.
The fiscal response to the health crisis has been swift, substantial and multi-pronged. Emergency measures, seeking to cushion the recessive shock and facilitate economic recovery, have been joined by recovery packages that support the ongoing upturn and pave the way for future growth. There are, however, disparities between countries as to the sums involved and the distribution of the measures. On our analysis, Italy has made the biggest effort, with a total running at 71% of GDP. It is followed by Germany, with 47%, Spain, with 31%, and France with 26%. As a percentage of GDP, Germany, France and Italy have made greater use of liquidity measures and guarantees, whilst Spain has focused on fiscal measures
The Eurozone has still not reached its cyclical peak. The situation has continued to improve over the past three months and the recovery has now spread to all parts of the economy. After rising strongly since April 2020, the Purchasing Managers Index (PMI) for the manufacturing sector levelled off at a very high level in June (63.1). Manufacturing PMI is still going strong, although the indicator suffered from a dip in the “new export orders” component, which slipped to 60.9 in June. Yet this level is still high compared to its long-term average.
The German economy is strongly rebounding according to our Pulse. The blue area, representing the situation in the past three months, has clearly expanded compared to that in the preceding three-month period (the area within the dashed line). The latest data confirm that the growth momentum is strengthening. In June, the IFO climate index reached 101.8 (2015=100), a highest since April 2018. Companies were notably more satisfied with their current business. The recovery is also broad-based with the climate index progressing in all sectors.
Our Pulse continues to show a significant improvement in France’s economic situation in recent months compared to the previous three months. For activity indicators, the blue area largely surpasses the area marked by the dotted line, whereas for the confidence surveys, it exceeds or is very close to the grey hendecagon that delineates the long-term average.
Despite a sharp increase in May (+1.98%), eurozone inflation continues to be driven by two components of the consumer price index (CPI) that are linked to energy prices. “Operation of personal transport equipment” was by far the biggest contributor to the rise in the CPI with a contribution of 0.87 percentage points (pp), or nearly half of headline inflation. This reflects the increase in pump prices. It is followed by “Electricity, natural gas and other fuels”, which contributed 0.43 pp to Eurozone headline inflation
One year after the introduction of State-Guaranteed Loans (SGLs), 39% of managers of the SMEs that took them out have indicated that they have made little or no use of the funds, whilst barely one-third stated that they had used the majority of their loan. This precautionary behaviour led companies to hoard all or part of their SGL in order to build up a liquidity reserve under favourable terms. Meanwhile, the share of managers who expect to repay their loans in full over several years has increased (41% in September 2020 to 56% in April 2021), whilst the proportion expecting to make at least partial repayment in 2021 has decreased (from 36% to 23% respectively)
Judging by the recent data, the acronym PEPP that was introduced last year when the ECB launched its Pandemic Emergency Purchase Programme, could also be seen as a reference to the pandemic’s exceptional price pressures. The upcoming governing council meeting and the new staff projections are eagerly awaited. Whether PEPP will be prolonged beyond March 2022 ultimately depends on the inflation data. It seems likely that the ECB will postpone its decision until after the summer in order to have a better view of the inflation outlook.
The latest economic figures from Spain have shown so far a substantial gap between the very positive signals from opinion surveys and the hard data, particularly on consumption, where a significant rebound has yet to materialise.
Eurozone member states mobilised massive public resources in response to the Covid-19 emergency, providing support for households as well as companies facing a loss of business. As a result, the public debt ratio rose sharply in 2020 to 98% of GDP. Since there is still a big need for economic support in the first part of the year, the Eurozone debt ratio will probably cross the threshold of 100% of GDP in 2021. The ECB plans to continue purchasing assets as part of its Pandemic Emergency Purchasing Programme (PEPP) at least until March 2022, at a time when the Eurosystem currently holds nearly 30 percentage points of GDP in Eurozone public debt instruments. The first disbursements of the Next Generation EU recovery plan are slated for the second half of 2021
The economic shock caused by the Covid-19 pandemic has resulted in a sharp increase in banks’ cost of risk. This has been particularly steep for the Spanish, Italian and Portuguese banking systems, which are notably oriented towards retail banking and have relatively high levels of exposure to the sectors most affected by the pandemic. Moreover, the effects of the sanitary crisis on the cost of risk have been exacerbated by the forward-looking approach of the IFRS 9 impairment model for financial instruments, which has been in force since 1 January 2018. Under this accounting standard, it is not the defaults themselves that give rise to the recording of provisions for impairment, but the mere expectations of such defaults
In Sweden, the economy continued to rebound in the first quarter with GDP up 0.8% q/q, driven primarily by exports, inventory building and an upturn in household consumption. On a year-on-year basis, growth is about to swing into positive territory (-0.1% y/y in Q1 2021). Confidence surveys suggest that the recovery is only just beginning. According to the European Commission, the business climate in industry has surged over the past two months to a record high since the creation of the survey in 1996. It also improved strongly in services. Consumer confidence has also picked up, albeit not quite as robustly
The cyclical trough seems to be behind us in the Eurozone at a time when vaccination campaigns in the member states are accelerating. From a macroeconomic perspective, the catching-up dynamic seem to be stronger than expected by many analysts. Yet the general economic improvement masks important sector disparities. The Covid-19 crisis will have stronger and more lasting effects on certain sectors, like hotel and restaurant services. In the months ahead, there is a risk that more companies will go bankrupt, especially in the hardest hit sectors.
The Pulse for May shows that the economy is slowly recovering from the sharp downturn caused by the coronavirus pandemic. Unlike in previous months, the recovery is no longer limited to manufacturing and construction, but is now broadening to services.
The Italian economy is continuing to improve, as shown in the latest gains in our Pulse. Industrial activity, which had already enjoyed a significant upturn over the winter, strengthened further this spring: the manufacturing PMI reached 60.7 in April, the best reading on record.
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.
Having been rising for several years now, non-financial company (NFC) sight deposits have been boosted to new record levels in the euro area under the influence of the health crisis and government measures to support company financing. Their outstanding amount reached EUR 2,591 bn for the euro area as a whole in March 2021 (of which 26% in France, 23% in Germany, 14% in Italy and 11% in Spain)
Our barometer shows a marked improvement in France’s economic situation in recent months compared to the three previous months. Yet the improvement is helped by a very favourable base effect. In April 2021, the base effect should be favourable again, despite another lockdown.
