The increase in supply side difficulties identified by INSEE’s economic surveys in April 2021 requires a closer look. It is to be hoped that it will not hold back a recovery that is only just beginning to take shape. The rise has been particularly noticeable in the industry sector and has mainly been blamed on procurement problems that significantly exceed average levels from past years. In the construction sector, a shortage of labour has been the main difficulty (as it was before the crisis) but procurement constraints have also increased sharply. In the services sector, supply side difficulties relate primarily to health protections measures. In this sector however, demand side problems are affecting a greater number of companies
Employment and the jobless rate are both expected to rise in 2021, but the size of these movements is very uncertain. The rise in employment is likely to be limited, while the upturn in the jobless rate risks being big. The France Relance recovery plan will surely help boost employment. Uncertainty over the size of its rebound is linked in part to the vigour of the economic recovery. Above all, employment recovery will be hampered by several headwinds: the lagged impact of the GDP plunge in 2020, the increase in corporate bankruptcies, persistent sector differences, the return to work of furloughed or short-time workers, and corporate efforts to restore productivity gains and margins. As to the unemployment rate, the dynamics of employment and the labour force are both uncertain
Growth in Central Europe looks set to accelerate in the 2nd quarter of 2021, after already a good performance in the 2nd half of 2020, as indicated by the capacity utilisation rate in the manufacturing sector. This highlights good resilience despite a shortage of chips in the automotive sector and a fairly severe 3rd wave of Covid in the 1st quarter of 2021. Improving business conditions in the industrial sector stem from the on-going recovery in demand, specifically for exports: this has already allowed economic activity in the Czech Republic and Slovakia to move above pre-Covid levels, whilst the Polish and Romanian economies have returned to around pre-crisis levels. This performance should allow the region’s GDP to recover its pre-Covid levels before the end of 2021 (growth of 4
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.
The German statistical office Destatis estimates that economic activity shrank by 1.7% in Q1 2021 after robust growth in the second half of 2020 (8.5% in Q3 and 0.5% in Q4). This was largely due to the tightening of the Corona restrictions in mid-December, which has been a drag on private consumption.
Given the way outstanding amounts of equity and debt are valued[1] in national financial accounts[2], debt ratios calculated using these figures can give a distorted picture of the financial structure of non-financial companies. In contrast, capital increases and self-financing give a reliable approximation of changes in company capital. Our calculations suggest that French companies went into the pandemic in a strengthened financial position. Thus, the unprecedented increase in financial debt in 2020 (EUR 206 billion, with nearly EUR 130 billion in the form of government-guaranteed loans) was preceded, between 2015 and 2018, by a marked rise in capital, as the result of a significant increase in equity issues
Limiting global warming will require huge investments, which will partly have to come from the public sector. This could lead to a crowding-out effect. Higher public borrowing requirements could push up interest rates and weigh on private investments. In the near-term such a risk seems remote. On the contrary, there could be a crowding-in effect with a reduction in climate-related risk and positive second-round effects from green public investments stimulating private investments. To reduce the risk that financial markets would exclusively focus on the impact on public indebtedness, governments should communicate clearly on the nature of their investments, insisting that they should have a return which is a multiple of the borrowing cost.
Italy’s cyclical improvement continues. This is reflected in our pulse, with several indicators rising above their long-term average. This is especially true for indices pertaining to industrial activity. The Purchasing Managers Index (PMI) for the manufacturing sector rose to its highest level in 21 years.
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.
Our chart shows an improvement in the French economy over the last few months, compared to the previous three ones: the blue-shaded area is larger than the dotted area. However, the picture that emerges from the monthly changes in the component indicators is made less clear by their yo-yo movements.
The barometer improved in March, driven by the manufacturing sector, where growth continues to pick up strongly. According to the purchasing managers index (PMI), confidence in the Spanish manufacturing sector has increased to 56.9, the highest level in more than 14 years.
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.
After a difficult start of the year, business cycle indicators improved markedly in March on the hope that the worst of the Covid-19 crisis is behind us. GDP is projected to reach the pre-Covid-19 level by the end of 2022. Many of the government support measures will remain in place this year. Fiscal policy for 2022 will depend on the outcome of the general election in September. After a significant weakening of the Christian-Democrats in the polls, a coalition between Greens, social-democrats, and liberals cannot be excluded. The business sector has been severely weakened during the crisis, but this is unlikely to have long-term consequences.
Contrary to what we were led to expect in late 2020, the discovery of vaccines did not end the stop-and-go nature of the recovery. In early 2021, due to the emergence of variants and the slow pace of the vaccination campaign, the exit from the crisis continues to follow a jagged trajectory. The light at the end of the tunnel seemed to be getting closer (Q4 2020 GDP did not decline as sharply as feared; a technical recession was apparently avoided in Q1 2021, with feeble but positive growth) but now it is fading again (the rebound has been pushed back until Q3, with Q2 growth verging on zero, and it could even slip into negative territory)
In 2020, real GDP fell by 8.9%, with almost 2.5 million of full-time equivalent jobs lost. The decline in consumption was the main driver of the recession, accounting for three fourths of the economic downturn. Stagnating incomes and the lack of confidence increased households’ propensity to save. The services sector was the most severely affected by the crisis, with value added declining by 8.1%, while manufacturing benefitted from the moderate recovery of exports. The problems raised by the pandemic combined with -and worsened- structural issues that had been slowing down the country’s economic growth up to now. In the years to come it will be hard to implement a solid growth pattern without decisive interventions that would foster innovation and productivity.
Economic growth remains extremely fragile in early 2021. In addition to the Covid-19 pandemic, Spain was hit by Storm Filomena in early January, which has had a direct negative impact, notably on consumption: both automobile and retail sales plummeted this winter. We now expect GDP growth to be flat in Q1. Even so, the economy could rebound strongly either this spring or more certainly by summer, although we cannot completely rule out the downside risks associated with the UK variant and a possible fourth wave of the coronavirus in Spain. We are forecasting real GDP growth of 5.9% in 2021 and 5.6% in 2022, following a record contraction of 10.8% in 2020.
Thanks to healthy government finances and a light lockdown strategy, the Netherlands weathered the crisis better than the surrounding countries. Nevertheless, the economy was in a mild recession in Q1 2021. Economic sentiment indicators point to rapid recovery in the second half of the year. Despite the clear victory of the outgoing government at the general election in March, the formation of a new coalition is in turmoil. Doubt has increased whether Mark Rutte can lead his fourth government in succession. The main task of the coalition is to put a recovery programme on the rails.
The Belgian economy shrunk by 6.3% in 2020. This amounts to the biggest post-war decline on record. A better-than-expected fourth quarter pushed the final numbers up somewhat and will have a positive effect on the yearly growth rate for the whole of 2021, which we see at 3.7%. Consumption suffered during the second lockdown at year’s end and is expected to dip again in April, as the government reinstated shopping on appointment only and instructed schools to extend the Easter holiday break. Unemployment increased significantly but less than was feared and the long-anticipated wave of bankruptcies hasn’t quite materialised so far. Tough choices lie ahead for the multi-party government, which should also focus on reining in its budget deficit in the years to come.
Portugal was one of the European countries hit hardest by the third wave of the coronavirus pandemic this winter. The government reinstated a “strict” lockdown that drastically reduced the spread of the virus. A very gradual reopening plan was launched on 15 March and will end on 3 May. Hopes for a solid economic recovery hinge on the vaccination campaign currently underway, but like elsewhere in the European Union, it is progressing at a slow pace. The success of the UK vaccination programme nonetheless raises promising prospects for the recovery of Portugal’s tourism sector, which is highly dependent on British tourists. Real GDP could rebound by as much as 5-5.5% in 2021, after contracting by 7.6% in 2020.
After a second, particularly long and severe wave of Covid 19 in late 2020, Sweden has been dealing with a third wave of the pandemic since mid-February. Although the vaccination campaign is unfolding satisfactorily, the resurgence of the pandemic risks pushing back the expected profile of the recovery. Monetary and fiscal policy will remain accommodating as long as necessary.
With relatively few deaths and only a mild decline in GDP in 2020, Denmark has been fairly resilient in the face of the Covid-19 pandemic. To counter a second wave of the virus, more restrictive health measures had to be introduced in early 2021, which will push back the timing of the recovery, albeit without jeopardising it. With its vaccination campaign unfolding smoothly and the extension of fiscal support measures, the country is well positioned to exit the crisis. To better control the krone’s peg to the euro, Denmark’s central bank has made major adjustments to its monetary policy.
In 2020, the Covid-19 pandemic had a much smaller impact on the French labour market than on GDP. On an average annual basis, GDP growth plunged 8.2% while private payroll employment declined by only 1.7%. The unemployment rate even fell slightly compared to 2019 (-0.4 points on an average annual basis). Employment was buffered by emergency support measures, notably the massive use of job retention schemes, which is the main reason why the overall negative impact was so mild
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...
In the northern European countries, the economic impact of the Covid-19 crisis in 2020 was one of the mildest in the European Union, with GDP contracting only about 3% in Sweden, Denmark and Finland, compared to a Eurozone average of more than 6%. To what extent has this enabled the economic agents of the Nordic countries to have greater confidence than their European neighbours? According to the latest European Commission surveys, the economic sentiment index picked up strongly in March 2021, a trend that can be seen in most of the European countries
The economic climate has slightly deteriorated in recent months according to the Pulse. The blue area in the chart shrank compared to the situation three months earlier. The main reason was the sharp fall in retail sales. This was partly due to the closure of non-essential shops since the middle of December...
