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Towards a delayed eurozone recovery?

2/5/2021

Eurozone real GDP growth in the final quarter of 2020 surprised favourably, which means that the contraction was smaller than anticipated. The current quarter should again see negative growth but attention is quickly shifting to the second quarter. Given the pace of vaccination, the level of new infections in many countries and the concern about the new variants, there is a risk that restrictions may need to stay in place for longer. This would mean a delay in the recovery, with a sizeable growth acceleration occurring as of the third quarter rather than in spring. This implies that pent-up demand in the second half could be even bigger. However, in the sectors impacted by the restrictions, the difficult times would last for longer and could lead to bigger scarring effects. Finally, an international comparison of the recovery speeds could influence capital flows and the euro, considering that the eurozone is lagging.

 William DE VIJLDER

TRANSCRIPT // Towards a delayed eurozone recovery? : February 2021

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On the Same Theme

Eurozone: Confidence surveys show some resilience in September 10/11/2021
According to our Pulse, the economic situation in the euro zone remains good (the blue area exceeds the grey hendecagon indicating the long-term average of the various indicators) and is relatively stable relative to the previous three months (the blue area is close to that delimited by the dotted line), with the notable exception of retail sales.
Eurozone: headline inflation at its highest since 2008 10/6/2021
Since year-end 2020, Eurozone inflation has risen almost vertically. A year ago, year-on-year inflation was still slightly negative, but by September 2021, it had risen to 3.4% (according to Eurostat’s preliminary estimate), the highest level since September 2008. The surge was strongest in Germany, followed by Spain, and to a lesser extent, Italy and France. In Germany, inflation bears the marks of the temporary VAT cut in H2 2020. In Spain, the upturn in energy prices was accentuated by a higher VAT rate on electricity than in most of the other European countries. The updating of weights in the price index also played an important role at the beginning of the year. Does this upsurge signal that inflation is back? No, at least not for the moment, since price increases are neither widespread nor self-sustaining. At 1.9%, core inflation is not as high. For the most part, the increase in inflation is due to a relative, and hopefully temporary, distortion of prices. A major base effect is at work, notably due to oil prices. It is exacerbated by the recent sharp rise in gas prices. There is also the impact of supply-side constraints on the prices of a number of commodities and industrial inputs, as well as the impact of extra demand for certain products following the end of lockdown measures. These upward pressures should dissipate in 2022. Before easing, however, inflation is expected to continue rising through the end of the year. We expect inflation to peak at nearly 4% year-on-year in Q4. As temporary and limited in scope as it might be, this inflationary surge is bound to have an impact on corporate margins and household purchasing power, and thus on growth. Another factor to watch is the possible transmission of inflation to all consumer prices and the triggering of a wage-price loop against a backdrop of strong hiring difficulties, which could trigger a more lasting upturn in inflation. But there are no signs of this yet.
Growth and inflation surge 10/6/2021
After rebounding vigorously in Q2 (+2.2% q/q), GDP growth is expected to maintain the same dynamic pace in Q3. Admittedly, supply-side constraints have just chipped away a few tenths of a percentage point of growth from our June forecast. September’s business climate surveys are showing more traces of these tensions, especially in industry, and in Germany in particular. Even so, the survey results are still holding at high levels. Growth in the Eurozone will get a boost from the monetary and fiscal accommodation, the freeing of forced savings built-up by households, the recovering job market and the need for investment. We expect 2022 growth to be slightly higher than in 2021 (5.2% and 5%, respectively, in annual average terms). However, the optimism of the big picture is somewhat tarnished by the simultaneous surge in inflation, even though a rather large part is only temporary. The ECB is expected to continue giving priority to growth. It will only make minimal efforts to begin normalising monetary policy by letting the Pandemic Emergency Purchase Programme (PEPP) expire in March 2022. Moreover, it should be offset by a larger and more flexible Asset Purchase Programme (APP). But the ECB is also signalling that is being vigilant about inflationary risks.
State-guaranteed loans account for 6.9% of all loans to NFCs 9/22/2021
In the first quarter of 2021 cumulated amounts of state-guaranteed loans (SGLs) granted by euro area banks reached EUR 376.4 bn, from EUR 184.7 bn in the second quarter of 2020. The proportion of total lending to non-financial corporations (which has remained relatively stable) represented by SGLs thus rose from 3.3% to 6.9% over the same period. French, Spanish and Italian banks have made a particularly substantial contribution to supporting economic activity during the Covid-19 pandemic. They granted 90.6% of all SGLs across the euro area (EUR 131.7 bn, EUR 108.7 bn and EUR 100.5 bn respectively) whilst their share of total lending to NFCs was only 57.7% on average between the second quarter of 2020 and the first quarter of 2021. Granting of SGLs has, however, slowed significantly since the start of 2021. In France, it was EUR 5.8 bn in the first quarter of 2021 and EUR 3.8 bn in the second, from EUR 11.1 bn in the fourth quarter of 2020.
Upside risks to inflation 9/20/2021
Although they have eased recently, high Eurozone manufacturing price pressures are fuelling analysts’ concerns that inflation could stay high for longer. There is an impression that the ECB is increasingly sympathetic for this view. This is important in the run-up to the December meeting of the governing council. Whether supply bottlenecks and rising input prices will have a longer-lasting effect on inflation depends on the transmission to the rest of the economy. One would expect it to be higher under a combination of strong demand, low inventory levels and long supplier delivery times. This corresponds to the current situation in the sectors producing durable consumer goods, intermediate goods and investment goods. Perhaps, inflation could surprise to the upside after all in the near term.
Eurozone: a vigorous recovery in the second quarter 9/13/2021
After two quarters of slight contraction (-0.4% q/q in Q4 2020, -0.3% in Q1 2021), during which lockdown restrictions were reintroduced in various countries in the zone, growth bounced back strongly in Q2 2021 (up 2.2% q/q, 14.3% y/y). The growth carry-over is nearly 4% and the gap to the pre-crisis GDP level of Q4 2019 is now only 2.5%. The strength of the rebound had already been seen in survey data from April to June, whether from Markit’s PMI or the European Commission’s Economic Sentiment Index (ESI).
ECB: accommodation with no end in sight 9/13/2021
The new macroeconomic projections of the ECB staff provide sobering reading for savers hoping that, one day, the policy rate will be raised. It is clear that at the current juncture, certain conditions of the recently updated forward guidance on interest rates states are not met. Based on the latest ECB projections, it seems this would still be the case in 2023, even under the hypothesis of a mild scenario. The slow increase of underlying inflation would probably be considered as unsatisfactory. Savers can only hope that the interaction between growth and inflation will evolve or that the ECB projections turn out to be too cautious.
Credit impulse remains negative in Q2, demand for financing expected to rise in Q3 8/30/2021
The credit impulse in the eurozone, reflecting the year-on-year change in credit outstanding, remained negative in June 2021. As a reminder, the introduction of financial support measures for companies by eurozone governments led to exceptionally strong but temporary growth in bank lending to non-financial corporations in spring 2020. Combined with this, the slowdown in outstandings seen a year later (+1.9% y/y in June 2021 vs. +5.3% in March 2021) squeezed the credit impulse in lending to non-financial corporations (-5.3% in June 2021 vs. +0.3% in March).
The ECB’s strategy review: “We’ve heard what you said and we’ve listened” 7/12/2021
The outcome of the ECB’s strategy review shows that the governing council has carefully listened to what its audience had to say. Its inflation objective is now truly symmetric, which addresses the perception that its previous objective was asymmetric. Three other changes reflect points that were strongly emphasized during the outreach events organised by the Eurosystem. The cost of owner-occupied housing will be taken into account when assessing the inflation environment. The communication will become geared towards a broader public and a decision has been taken to commit to an ambitious climate-related action plan. Now it’s back to the hard work of trying to push inflation up to 2%.  
A stronger recovery, higher inflation and an accommodating ECB 7/7/2021
The Eurozone economy is bouncing back. From a macroeconomic perspective, the region is closing the gap on the losses accumulated since spring 2020 more quickly than expected just a few months ago. Unless a new wave of the pandemic breaks out due to the spread of Covid-19 variants, Eurozone GDP should return to pre-crisis levels by the end of the year. Accelerated vaccination campaigns and the gradual lifting of health restrictions are reducing uncertainty and boosting the confidence of economic agents. Consumers, who have adapted to restrictive health measures, are playing a key role. Despite these favourable dynamics, public policies are remaining cautious. From a monetary perspective, the European Central Bank recently expressed some optimism concerning the Eurozone’s capacity to rebound, although for the moment it is refusing to begin tightening monetary policy. As to fiscal policy, investors welcomed the European Commission’s first bond issue to finance the Next Generation EU recovery plan.

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