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Towards a delayed eurozone recovery?


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.


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

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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
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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
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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
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