European Economic Outlook

European Economic Outlook

Strong rebound and temporary rise in inflation

The euro-zone is on the way to an almost full recovery. We expect Germany to regain its pre-pandemic level of activity later this year and the tourist-dependent southern countries to do so next year. The Delta variant may lead to some voluntary social distancing or self-isolating and perhaps limited restrictions over the winter, but we doubt that it will derail the recovery. Inflation will rise further than most expect in the coming months due to rising input costs and supply bottlenecks. But with wage agreements and inflation expectations remaining low, it will drop back and stay lower than most expect over the medium term. The ECB is likely to step up its standard Asset Purchase Programme substantially when its emergency purchases end next March and leave its deposit rate at -0.5% until beyond 2025, which is much later than investors expect.

16 July 2021

European Economic Outlook

Euro-zone being left behind

The slow vaccination programme has left the euro-zone well behind the US and UK incoming out of the health crisis. We think the economy will not expand at all in Q2 and GDP growth will be much weaker than the consensus expects this year. Nonetheless, on the assumption that half of the adult population has a first vaccine by around July, restrictions should then be lifted, triggering a sustained rebound. We think Germany will regain its pre-pandemic level of GDP early next year but the southern economies not until much later. Meanwhile, after rising this year, headline inflation is likely to drop back sharply next year as underlying price pressures and wage inflation remain very subdued. We also think the ECB will leave its deposit rate unchanged well beyond 2023, when the Fed will start tightening, and2024, when the market has priced in rate hikes in the euro-zone. The Bank will also continue with net asset purchases under the PEPP throughout 2022.

15 April 2021

European Economic Outlook

Vaccine to drive recovery but risks remain

The vaccine rollout is likely to make enough progress for most pandemic-related restrictions to be lifted in the spring. If so, we think euro-zone GDP will regain its pre-pandemic level by the middle of next year, with Germany getting there sooner and Spain much later. The economic recovery will be slower than in many other economies in part because policy support has been smaller. There are also multiple risks surrounding the pace at which the vaccines are rolled out and restrictions lifted. Meanwhile, inflation will rise as last year’s plunge in oil prices drops out of the year-on-year comparison, but it will stay even further below target than the ECB expects. The Bank will persist with its version of yield curve control and will leave the deposit rate at -0.5% for the foreseeable future.

21 January 2021
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European Economic Outlook

Second wave blows recovery off course

The second wave of coronavirus has caused the recovery to stall and we forecast euro-zone GDP to stagnate for the next six months, with an outright recession a significant downside risk. We think Spain’s economy will probably contract in Q4, while Germany is very likely to remain the region’s strongest performer. Governments will provide more fiscal support than previously anticipated, but this will not prevent unemployment from increasing which in turn will weigh on consumption. With inflation stuck well below target, the ECB will make its targeted loans to banks more generous and expand its emergency asset purchase programme, which should keep peripheral government bond yields falling.

19 October 2020

European Economic Outlook

Slow and uneven recovery

The economy has partially recovered from the impact of the coronavirus containment measures imposed earlier in the year, but it will be a long time before it gets back to normal. Even if there are no new nationwide lockdowns, we suspect that economic activity will be below pre-crisis levels until end-2022. Meanwhile, the gap between countries will widen as those which have been worst hit by the virus, have the largest tourist sectors, and/or have the least room for fiscal stimulus, will suffer the most. The ECB will do enough to prevent a new euro-zone crisis in the coming year or two but will not reverse the downward pressure on inflation, and nor will it be able to contain Italy’s rising debt burden.

21 July 2020

European Economic Outlook

Slump puts new strains on currency union

The lockdown has triggered the biggest economic slump since WW2 with activity likely to drop by around 20% in Q2. As the peak of the epidemic passes, restrictions will be lifted gradually, and household consumption will pick up again. But spending will remain much lower than before the coronavirus because some restrictions will remain in place and private sector balance sheets, including banks’, will be damaged. Also, the uneven impact of the slump will put huge strains on the currency union. The ECB has done enough to contain sovereign bond spreads for now, but it may need to do more particularly if the euro-zone fails to agree joint fiscal support.

21 April 2020

European Economic Outlook

ECB to keep pushing on a string

We expect economic growth to remain sluggish this year as external demand picks up only slowly and domestic demand softens. Employment growth is slowing, which will cause household incomes and spending to weaken, and investment intentions have slumped. Germany’s industrial recession looks set to persist during the first half of the year, and its services sector to lose momentum. Meanwhile, Italy is still close to recession, but France and Spain should continue to outperform. We suspect that core inflation will drop back to around 1% over the coming months, prompting the ECB to ease policy in the second half of the year.

European Economic Outlook

Euro-zone close to recession

Economic growth has slowed to a crawl and is likely to remain anaemic until well into next year, even in the absence of a fresh external shock. Germany is probably in a recession already and we think it will not recover for a long while yet; Italy’s economy is set to flatline; and France will lose momentum as the region slows. German policymakers are unlikely to respond to mounting calls for a fiscal stimulus unless the unemployment rate there rises sharply. Meanwhile, although core euro-zone inflation is stuck close to 1%, an increasingly divided ECB will bide its time before making any further policy moves. That said, we think it will cut its deposit rate to -0.8% and further increase its corporate bond purchases next year.

15 October 2019
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