Perspectives

Cautious but hopeful

st  
Eco Perspectives // 1 quarter 2021  
economic-research.bnpparibas.com  
8
EUROZONE  
CAUTIOUS BUT HOPEFUL  
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 second wave of the Covid-19 pandemic created a shock that halted  
the Eurozone’s economic recovery, even though it was not as strong  
as the initial shock in March-April. The development of a vaccine is  
encouraging news, but it could take some time before it has an impact  
on the economy.  
GROWTH AND INFLATION (%)  
GDP Growth  
Inflation  
Forecast  
5.6  
Forecast  
7
5
3
1
1
3
5
7
9
3.9  
A YEAR AFTER THE PANDEMIC BEGAN, HOW IS THE EUROZONE  
ECONOMY FARING?  
1
.3  
1.2  
1.3  
0
.8  
0
.2  
-
-
-
-
-
Economic growth in the Eurozone was especially erratic in 2020,  
depending on the number of Covid cases. How do things currently  
stand compared to the pre-pandemic situation? The catching-up phase  
has not fully run its course yet. The second wave of the Covid-19  
pandemic has slowed the economy’s momentum, and the Eurozone  
remains weakened. Yet compared to March and April, two months  
marked by an abrupt drop-off in supply and demand, the situation  
has begun to normalise. All cyclical indicators pertaining to business  
sectors, output and private consumption are rising towards pre-crisis  
levels (see chart 2). The second wave of the Covid-19 pandemic hit  
most of the Eurozone member states, but it was not as virulent as the  
first wave and supply capacity was not hit quite as hard (schools, for  
example, generally remained open, which enabled parents to continue  
working). Although they do not provide a perfect picture of households’  
consumption, retail sales rebounded strongly and have now surpassed  
year-end 2019 levels. Looking beyond the automatic rebound due to  
pent-up demand, fiscal support measures also helped limit the loss  
of households’ purchasing power. Manufacturing output, in contrast,  
is still below pre-crisis levels, which reflects in particular sluggish  
corporate investment. In recent months, however, manufacturing keeps  
showing resilience, as illustrated by the sector’s purchasing managers  
-
7.5  
2019  
2020  
2021  
2022  
2019  
2020  
2021  
2022  
CHART 1  
SOURCE: BNP PARIBAS GLOBAL MARKETS  
EUROZONE ECONOMIC INDICATORS  
PMI manuf. (RHS)  
PMI serv. (RHS)  
Economic sentiment  
Retail sales (100=Dec 2019)  
Manufacturing prod. (100=Dec 2019)  
Threshold 50  
110 Base 100  
60  
50  
40  
30  
20  
10  
1
00  
90  
8
7
6
0
0
0
1
index (PMI) , which has been holding above the 50 threshold since July.  
Inversely, activity in the services sector continues to erode, and the  
sector PMI held far below 50 in November (41.7, down from 46.9 in  
October). These trends illustrate the asymmetrical impact of the crisis  
depending on the sector specialisation of member states.  
All in all, the Eurozone economy is not out of danger yet, and we  
expect Q4 2020 GDP to decline again. Full-year GDP growth is expected  
to contract by 7.5%, before rebounding to 5.6% in 2021, and then  
slowing again to 3.9% in 2022. Eurozone GDP will not rise above pre-  
crisis levels before this horizon. These figures mask major disparities  
between member states and raise fears of greater divergences within  
the Eurozone. Germany, for example, should return to pre-crisis levels  
well before Spain. The development of a vaccine is encouraging news.  
Yet since it will take time to immunise a sufficient proportion of the  
population and it is uncertain how well the vaccine will be accepted,  
it could take longer for the economic impact of the vaccine to be felt.  
CHART 2  
SOURCE: EUROPEAN COMMISSION, EUROSTAT, MARKIT  
MONETARY POLICY WILL NOT BE NORMALISED ANYTIME  
SOON  
The monetary authorities continue to worry about the disinflationary  
impact of the pandemic. In November 2020, Eurozone inflation held in  
negative territory for the fourth consecutive month (-0.3% y/y), while  
core inflation, i.e. adjusted for products with the most volatile prices,  
1
The Purchasing Managers Index (PMI) is based on a survey of business leaders. The survey provides an accurate picture of the economic health of various business sectors (manufactu-  
ring, tradeable services, construction). A score of 50 is the threshold separating contraction from expansion phases.  
The bank  
for a changing  
world  
st  
Eco Perspectives // 1 quarter 2021  
economic-research.bnpparibas.com  
9
remained positive but at historically low levels (+0.2%). Low inflation  
is especially prevalent in tourism-related services, which are at the  
forefront of social distancing requirements and lockdown restrictions  
that have been set up around the globe. Faced with this environment,  
the European Central Bank (ECB) has decided to take new measures at  
its 10 December meeting, as it has clearly announced. In particular, the  
envelope of its Pandemic Emergency Purchase Programme (PEPP) has  
been increased by EUR 500 bn and the horizon extended to at least the  
end of March 2022. The distribution of a vaccine is unlikely to trigger  
a tightening of monetary policy, since the ECB is still wary about the  
financing conditions of member states (see chart 3).  
EUROZONE: 10-YEAR SOVEREIGN RATES  
Germany  
Spain  
France  
Portugal  
Italy  
%
2.5  
.0  
1.5  
2
1.0  
0.5  
0.0  
Major signals concerning future monetary policy decisions could emerge  
around mid-2021, when the ECB plans to finish its strategic review.  
This review, which follows in the wake of the one conducted by the  
US Federal Reserve (the Fed), will mainly focus on the inflation target  
and potential changes in monetary instruments to attain its targets.  
The ECB could change its tune by insisting more on employment and  
the symmetrical nature of its medium-term inflation target. Like the  
Fed, the ECB could be more inclined to accept inflation of more than  
-
-
0.5  
1.0  
CHART 3  
SOURCE: ECB  
2
% without tightening its monetary policy. That would introduce a new  
accommodating bias for monetary policy.  
EUROZONE: CHANGE IN THE PRIMARY STRUCTURAL BALANCE  
(
% OF POTENTIAL GDP)  
WHAT FISCAL SUPPORT CAN BE EXPECTED IN 2021?  
The relationship between fiscal and monetary policies could be one  
of the themes covered in the ECB’s strategic review. Member state  
governments are benefiting from the suspension of European fiscal  
1
0
2020  
2021  
2022  
rules, which has enabled them to absorb a big part of the shock in  
2
2
020. Measured by the change in the primary structural balance , there  
-1  
-2  
was a very strong fiscal impact this year, even though the size varied  
from one member state to the next. At the aggregate level, based on  
the European Commission’s most recent estimates (which date back  
to 5 November), the Eurozone’s fiscal impulse was about 3.5 points  
of potential GDP. This massive intervention was necessary given the  
size of the shock, and it helped limit the loss of household revenues  
and corporate bankruptcies. In 2021, support from government  
administrations will diminish dramatically: at the aggregate level  
the impact will be more or less neutral in the Eurozone (see chart 4).  
With the expected rebound in growth and the reopening of businesses,  
short-time working schemes will be gradually withdrawn. Questions  
about tightening fiscal policy or stabilising the public debt ratio will  
rapidly become hot topics of debate again. Yet even if the normalisation  
of the Eurozone economy were to accelerate in 2021 and beyond, for  
the moment it is still weak, and an excessively rapid withdrawal of  
fiscal support could be counterproductive. In the short term at least,  
maintaining favourable financing conditions limits the risks of public  
debt rollover. In any case, based on cumulative information currently  
available for the period 2020-2022, the Eurozone will probably  
maintain an expansionist fiscal policy (cumulative impulse of about  
-
-
-
3
4
5
Deterioration of the balance  
=> positive impulse  
=> positive impact on growth  
Euro area  
Germany  
Spain  
France  
Italy  
CHART 4  
SOURCE: AMECO  
2
.5% of potential GDP). The European stimulus fund Next Generation  
EU should begin to support national policies as of next year. The strong  
emphasis on investment should have a bigger multiplier effect on  
activity in the medium term.  
Completed on 15 December 2020  
2
The primary structural balance corresponds to the public balance adjusted for cyclical effects and interest charges.  
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for a changing  
world  
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