Perspectives

Running out of breath

Eco Perspectives // 4th quarter 2020 (completed on 30 September 2020)  
economic-research.bnpparibas.com  
8
EUROZONE  
EUROZONE RECOVERY: RUNNING OUT OF BREATH  
After a more vigorous than expected recovery following the end of lockdown, the trend now seems less energetic.  
There is still lost ground to make up and the end of the year, beset by uncertainty on the health and economic fronts,  
is likely to see a marked decline of growth. In our central scenario, there is no return to pre-crisis GDP level before the  
forecast horizon at the end of 2021. Coupled with this, deflationary pressures are building, and the strengthening of  
the euro intensifies this dynamic. So far the European Central Bank has been patient, but has indicated its willingness  
to take new measures. If the current situation persists, an extension of emergency monetary measures, in terms of  
both size and duration, looks likely.  
The economic recovery in the eurozone appears to be running out of  
GROWTH AND INFLATION (%)  
breath. After an historic contraction in Q2 2020, and a mechanical  
rebound in Q3, economic activity is likely to slow significantly over the  
next few quarters. Recent inflation movements are a source of concern  
for monetary policy makers.  
GDP Growth  
Forecast  
Inflation  
Forecast  
8
6
4
2
0
2
-4  
6
8
5
.2  
THE GAP HAS NOT YET CLOSED  
1
.9  
1.8  
1
.3  
1.2  
0
.9  
The recent stabilisation of economic indicators sends a mixed signal.  
Following the lifting of lockdown measures, economic activity bounced  
back strongly but has since stabilised. The composite Purchasing  
0.3  
-
1
Managers Index (PMI) for the eurozone slipped back from 54.9 in  
-
-
July to 51.9 in August. Activity keeps growing continues at a slower  
pace than in previous months. A similar picture emerges in services,  
where the PMI fell from 54 in July to 50.5 in August. In manufacturing,  
the PMI stabilised at 51.7 in August. The services sector continues to  
suffer from cautious consumer behaviour. Services, which account for  
a majority of household expenditure (more than 50% of the total in  
-
8.0  
-
-
10  
12  
2018  
2019  
2020  
2021  
2018  
2019  
2020  
2021  
CHART 1  
SOURCE: BNP PARIBAS GLOBAL MARKETS  
2
the eurozone) , have suffered in particular from a lack of consumer  
confidence in the region. The consumer confidence index has seen no  
further improvement since June and remains below its levels in the  
months leading up to lockdown (-14.7 in August, from -11.6 in March  
and -6.6 in February). This observation can be observed in retail sales  
dynamic. Although retail sales figures are an incomplete record of final  
household consumption, they suffered a sharp fall since when they  
have posted only a timid recovery. They grew by only 1.3% in June  
REAL GDP GROWTH  
Real GDP (100 = Q4 2019)  
05  
1
1
(
year-on-year), and then slowed to +0.4% in July.  
00  
In all, we expect eurozone GDP growth to bounce back to 9.0% q/q in  
Q3 2020, having fallen by 12.1% in Q2 2020, before slowing markedly,  
to 1.5%, in Q4. Growth is likely to average -8.0% over the whole  
year 2020, before rebounding to 5.2% in 2021. These trends will not  
allow the economy to return to pre-crisis levels within our forecast  
horizon (Figure 2). Significant differences exist between individual  
eurozone countries. The differences in speed of recovery weigh on the  
performance of each country given the zone’s integration, notably in  
terms of trade. High level of uncertainty surrounds the macroeconomic  
scenario, in particular caused by the resurgence of the epidemic in some  
eurozone countries. According to ECB estimates, under a pessimistic  
scenario (a big second wave of the epidemic and enhanced protective  
health measures), real eurozone GDP at the end of 2022 would still be  
nearly 6% below its pre-crisis level.  
9
5
90  
8
5
0
8
Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021  
CHART 2  
SOURCE: AMECO, BNP PARIBAS  
3
mid-2016. Underlying inflation fell back considerably, hitting a record  
low of +0.4%. In more detail, the sharpest decline in prices since the  
beginning of 2020 has come in the transport sector, which is hardly  
affected by the abrupt fall-off in tourist numbers since the beginning  
of the pandemic. Inflation figures for recent months should be treated  
with some caution. Some of the slowing of prices comes in shifts in  
INFLATION HEADACHES  
In this macroeconomic situation that remains depressed and uncertain,  
deflationary pressures are mounting. In August, total eurozone inflation  
fell into negative territory, at -0.2% y/y, for the first time since  
1
The PMI is based on data from a survey of business leaders. The survey offers a reliable picture of the economic health of various sectors of the economy (manufacturing,  
services, construction). Phases of contraction and expansion lie either side of the 50 point threshold.  
2
3
B. Cœuré, “The rise of services and the transmission of monetary policy”, Speech at the Conference on the World Economy, May 2019  
Underlying inflation is corrected for volatile components (energy and food) as well as alcohol and tobacco.  
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Eco Perspectives // 4th quarter 2020 (completed on 30 September 2020)  
economic-research.bnpparibas.com  
9
timing of the sales season in certain eurozone countries (France for  
nstance), as well as the VAT cut in Germany as part of its economic  
stimulus package. Although it is probably still too early to talk about  
PURCHASE MANAGERS INDEXES  
4
deflation , these are nevertheless striking figures that put the ECB in a  
PMI Manufacturing  
PMI Services  
Consumer confidence (RHS)  
0
tricky position.  
6
0
0
The negative demand shock triggered by the Covid-19 crisis has hit  
price trends. This movement has been amplified by the strengthening  
of the euro against the dollar and also against a trade-weighted bas-  
ket of currencies for the eurozone (nominal effective exchange rate).  
This stronger currency reduces imported inflation which, ultimately,  
reduces domestic inflation. Although the effect of currency movements,  
particularly when on a small scale, is less pronounced than in the past,  
the situation is nevertheless being followed closely by the monetary  
authorities. In addition, recent moves by the US Federal Reserve (Fed)  
could result in changes at other central banks. The Fed has modified  
its inflation target, and is now aiming at an average figure of 2%. As a  
result, no increase in US rates is expected in the near future. The Fed  
has introduced a fairly accommodating bias into its policy, creating  
structural support for the euro against the dollar. The ECB, which has  
itself launched a strategic review, will need to take this into account.  
5
-
-
5
40  
30  
10  
-15  
20  
2
0
0
0
-
1
-25  
august 2020  
2019  
2020  
CHART 3  
SOURCE: MARKIT, EUROPEAN COMMISSION  
At its quarterly meeting in September 2020, the ECB, through its  
President, Christine Lagarde, indicated that the currency issue is  
important, but did not make any immediate changes to its monetary  
policy. The current high level of uncertainty, the increasingly anaemic-  
looking recovery and a tightening of financial conditions as a result  
of the euro’s continued appreciation could lead the ECB to extend its  
Pandemic Emergency Purchase Programme (PEPP) beyond June 2021  
and to increase its total envelope, currently set at EUR 1.350 billion. It  
seems clear from the ECB’s blog that the monetary institution is ready  
to do more. A recent post from its Chief Economist, Philip Lane, said:  
INFLATION  
Inflation totale  
Inflation sous-jacente  
5
%
%
%
%
%
4
3
2
1
It should be abundantly clear that there is no room for complacency.  
Inflation remains far below the aim and there has been only partial  
progress in combating the negative impact of the pandemic on  
projected inflation dynamics”.  
National stimulus programmes will form another key pillar in the  
recovery. The risk of defaults and rising unemployment over the coming  
months is particularly high. On a European scale, the agreement  
reached regarding the “Next Generation EU” stimulus plan is a key  
stage and the thorny question of its financing is as urgent as ever.  
In their votes on 16 September 2020, MEPs recognised the need to  
introduce new sources of revenue into the EU’s budget (own resources).  
These new taxes, targeting digital businesses for example, could,  
however, be a new source of conflict between member states.  
0%  
1%  
-
CHART 4  
SOURCE: MARKIT, BNP PARIBAS  
4
Deflation is defined as a permanent and widespread process of falling prices. A situation where only certain prices fall is not considered to be deflation.  
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for a changing  
world  
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