Perspectives

A stronger than expected economic recovery?

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Eco Perspectives // 2 Quarter 2021  
economic-research.bnpparibas.com  
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EUROZONE  
A STRONGER THAN EXPECTED ECONOMIC RECOVERY?  
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.  
Although the virus is still spreading actively in most of the Eurozone  
GROWTH AND INFLATION (%)  
member countries, the economic horizon has brightened with the  
rollout of vaccination campaigns. Yet the Covid-19 pandemic will have  
GDP Growth  
Forecast  
Inflation  
to come under full control and economic agents will have to regain  
confidence before the economy returns to more normal levels of  
sustainable growth.  
Forecast  
7
5
3
1
1
5.0  
4.2  
1.7  
SOME ENCOURAGING SIGNALS, DESPITE THE REST  
1.3  
1.2  
1.4  
0.3  
Even as new health restrictions and lockdown measures are straining  
the momentum of the Eurozone recovery, some recent economic news  
is nonetheless providing grounds for optimism.  
-
-3  
-5  
As a highlight the big increase in the March 2021 purchasing managers  
index (PMI), which is closely monitored by economic experts. After  
virtually stagnating since year-end 2020, the composite PMI rose  
above 50 to 52.5 in March (flash estimate), for the first time since  
October 2020. In other words, private sector activity in the Eurozone  
expanded for the first time in six months. This performance, which  
was much better than the consensus forecast, can be attributed to  
cyclical improvements in the manufacturing sector as well as in market  
services. Although the services PMI remained below 50, it nonetheless  
rose in March to 48.8, beating expectations. The manufacturing PMI  
reached a record high of 62.4 in March, up from 57.9 in February.  
Without jumping to conclusions, this strong performance reflects the  
turnaround in the “jobs” component, which rose to 54.7 in March, from  
-
7
9
-
6.8  
-
2019  
2020  
2021  
2022  
2019  
2020  
2021  
2022  
CHART 1  
SOURCE: BNP PARIBAS GLOBAL MARKETS  
PMI  
70  
60  
PMI Manufacturing  
PMI Manufacturing "Employment"  
PMI manufacturing "New export orders"  
PMI Services  
5
1.5 the previous month, as well as the upturn in the “new export  
orders” component (62.4).  
5
4
3
0
0
0
Economic players seem to be adapting better to social distancing and  
other restrictive measures, but an ongoing improvement in Eurozone  
economic growth will depend on the success of the vaccination  
campaigns. This is the key to restoring the confidence of economic  
agents over the long term. Here too, the latest statistics are rather  
favourable: the European Commission’s economic sentiment and  
consumer confidence indices rose to the highest levels in the past year.  
Even so, the consumer confidence index is still fragile, and far below  
pre-pandemic levels.  
20  
10  
Jan-20 Mar-20 May-20  
CHART 2  
Jul-20  
Sep-20 Nov-20  
Jan-21 Mar-21  
On the whole, we expect to see a notable acceleration in the Eurozone’s  
economic recovery as of H2 2021. Three key factors will drive this  
movement: an increase in the pace of vaccinations, the release of pent-  
up demand once restrictive measures are lifted, and support from the  
policy mix within the Eurozone and from the American Rescue Plan.  
This rescue plan should have a positive impact on Eurozone growth  
in the quarters ahead. We expect to see a net rebound in Eurozone  
GDP growth over the full year (with average annual growth of 4.2%),  
followed by another acceleration to 5% in 2022. Under this scenario,  
Eurozone GDP could return to pre-crisis levels by H1 2022.  
SOURCE: REFINITIV  
ECB: FINANCING CONDITIONS AS AN INTERMEDIATE  
TARGET  
A vigorous economic recovery coupled with rising input prices and  
longer turnaround times have raised fears that prices could accelerate  
sharply in the months ahead. These fears are particularly strong in  
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nd  
Eco Perspectives // 2 Quarter 2021  
economic-research.bnpparibas.com  
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the United States. In the Eurozone, where year-on-year inflation rose  
to 1.4% in January, before easing to 1.1% in February (see chart 3), the  
inflationary pressures observed since early 2021 are likely to be short-  
lived, making the risk of strong price increases less of an issue. From an  
economic perspective, the recovery phases in the United States and the  
Eurozone are following different dynamics. First, vaccination campaigns  
are rolling out much more rapidly in the US than in the member tates.  
Second, the American Rescue Plan, which is largely geared towards  
stimulating short-term demand, is much bigger in scope and thus more  
likely to create bottlenecks. Lastly, the contraction of US GDP in 2020  
was only about half the size of that in the Eurozone (-3.5% vs. -6.8%)  
and the US output gap (i.e., the gap between effective and potential  
production) did not swell as much according to IMF estimates. Note  
that the current situation makes it very difficult to interpret pricing  
trends. From a statistical perspective, the pandemic and lockdown  
measures have made it impossible to report certain prices, and the  
average consumer basket has been modified significantly. Tax changes  
in 2020, like the temporary VAT cut in Germany, also create major base  
effects.  
SOVEREIGN 10-YEAR INTEREST RATES (%)  
2.0  
1.5  
1.0  
Germany  
France  
United Kingdom  
United States  
0
0
.5  
.0  
-
-
0.5  
1.0  
Jan-20 Mar-20 May-20 Jul-20  
Sep-20 Nov-20 Jan-21 Mar-21  
SOURCE: REFINITIV  
CHART 3  
The rise in inflation expectations in the United States is putting upside  
pressure on US long-term rates, and through a knock-on effect, on  
Eurozone rates. For member states, the upturn in interest rates was  
nonetheless limited (see chart 3), which is reassuring given the  
Eurozone’s more timid and differentiated recovery. The European  
Central Bank (ECB) insisted that the real danger lies in an upturn  
in interest rates without an improvement in the macroeconomic  
environment. According to the ECB, inflation is unlikely to rise in a  
lasting manner in the Eurozone. Despite an upward tendency, inflation  
is expected to rise to only 1.4% in 2023: which is still low compared to  
the central bank’s medium-term target of 2%. Consequently, we should  
not expect any monetary tightening from the ECB.  
AtameetinginMarch, ECBpresidentChristineLagardetookthefinancial  
markets by surprise when she announced that the central bank would  
significantly increase the pace of securities purchases as part of the  
Pandemic Emergency Purchase Programme (PEPP). Without changing  
the amount, Ms. Lagarde nonetheless indicated that volumes would be  
increased if necessary to maintain favourable financing conditions in  
the Eurozone. Even if the PEPP funds were used in full by March 2022  
INFLATION (%)  
1.6  
total inflation  
Core inflation  
1
1
1
.4  
.2  
.0  
0.8  
0
0
0
0
.6  
.4  
.2  
.0  
-0.2  
-0.4  
janv.-20 mars-20 mai-20  
juil.-20 sept.-20 nov.-20 janv.-21  
SOURCE: REFINITIV  
(
when the programme is set to expire), the ECB would maintain its  
approach to avoid any tightening of monetary conditions. If the PEPP is  
not renewed, based on the assumption that the worst of the Covid-19  
crisis is behind us, then the ECB might envision greater flexibility in  
securities purchases through the Assets Purchases Programme (APP).  
CHART 4  
Fabio Panetta, an ECB Executive Board member, recently pointed out Fund after an appeal was filed contesting the funding mechanism  
that monetary support would be necessary as long as inflation does based on issuing European debt. Unfortunately, this major step  
not hold sustainably at the target level, which probably will not occur towards European construction, initiated during the debt crisis, is still  
until well after the pandemic ends.  
struggling to take shape.  
Completed on 31 March 2021  
WHAT CAN WE EXPECT IN TERMS OF A FISCAL STIMULUS?  
With so much uncertainty over the pandemic situation, it is difficult to  
discern how the Eurozone member states will orient their fiscal policy.  
The health crisis is getting worse in most countries, which suggests  
that fiscal support will be extended and increased at the national level.  
At the European level, even before the first subsidies from the Next  
Generation EU plan can be paid out -probably not until summer 2021-  
the programme is already being challenged. Germany’s Constitutional  
Court has suspended the ratification process for the European Recovery  
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QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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