New government in Italy
The decision by the Five Star Movement to support Mario Draghi means that the coalition will have a huge majority and that no single party could collapse the government by pulling out. This should also make it easier to approve fiscal packages and reforms, so the news has been greeted warmly by investors. At the time of writing, Italy’s 10-year yield was at a record low of 0.44%.
While all of this is good news for the near-term outlook, we won’t get carried away about the government’s chances of turning the Italian economy around. (See here.) Even with broad support for Mr Draghi’s reported list of priorities – health, jobs, business, schools and environment – we don’t yet know many details, and there is plenty of scope for government infighting about what needs to be done about each of them. Mr Draghi is expected to present his policy programme to parliament next week.
At the European level, he is said to be strongly in favour of creating a euro-zone budget. The parties in his government that have historically been Eurosceptic – Lega and Five Star – have sounded more pro-Europe recently and presumably support the idea too. But we still doubt that any meaningful progress will be made at the European level for some time, particularly given how slow progress has been with Next Generation EU.
Infections falling but vaccinations still too slow
Meanwhile, daily Covid-19 infections have been falling in the euro-zone for 3 weeks and ICU occupancy is declining in most countries.
This week, France’s health minister suggested that a new lockdown was unlikely, while Italy’s authorities have put most of the country in the second-lowest tier of the four-tier system. By contrast, the German government this week extended its lockdown until 7th March, despite the country already having among the lowest numbers of daily infections in the region.
Regardless of recent tinkering with containment measures, as long as the share of the population that has been vaccinated remains low, some level of restrictions will remain in place. And the euro-zone’s poor vaccine performance is well known. So far, the UK has administered at least one jab to nearly a fifth of its population, while in the major euro-zone countries less than 3% of the population have had a jab. Admittedly, Germany, Italy and Spain have actually given second doses to larger shares of their populations than the UK. (See Chart 1.) But it still seems very likely that the UK will be in a position to lift restrictions much sooner than the euro-zone.
Chart 1: Vaccinations (% of Population) |
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Source: Our World in Data |
In terms of the total number of doses administered, the euro-zone is where the UK was about 4 weeks ago, and that gap might increase because euro-zone authorities are still vaccinating at a much slower pace. As a rule of thumb, we estimate that the current restrictions knock about 0.1% from annual GDP per week. So for every extra month that euro-zone authorities keep these measures in place, they lose the best part of half a percent from annual GDP.
The week ahead
Next Thursday, the ECB will publish the account of January’s policy meeting, which might contain more information on how the Bank measures “financing conditions”.
We expect data published next week to confirm that euro-zone GDP fell by 0.7% in Q4, while consumer confidence and the PMIs will remain consistent with activity falling in February.
Data Previews
Euro-zone Industrial Production (Dec.) Mon. 15th Feb.
Forecasts | Time (GMT) | Previous | Median | Capital Economics |
Industrial Production m/m (y/y) | 10.00 | +2.5%(-0.6%) | -0.5%(-0.2%) | -1.5%(-0.6%) |
A fall in December, mostly due to Ireland
Euro-zone industrial production is likely to have contracted in December. This is mostly because Ireland’s output slumped after a spike in November.
After slumping by 28% during the first lockdown, euro-zone industrial production recovered rapidly from May to reach just 3.2% below its February level in November.
National data already published show that industrial production excluding construction rose by 0.6% m/m in Germany, fell by 0.8% in France and was down slightly in Italy. But a 25% m/m decline in Ireland will have pulled down the aggregate number to around -1.5% m/m, leaving it just 0.6% below its December 2019 level. (See Chart 2.)
We expect euro-zone industrial production to have been roughly flat in the first quarter as the sector is well placed to weather the current restrictions.
Chart 2: Euro-zone Industrial Production (% y/y) |
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Source: Refinitiv |
Euro-zone GDP (Q4, 2nd Est.) & Employment (Q4) Tue. 16th Feb.
Forecasts | Time (GMT) | Previous | Median | Capital Economics |
GDP q/q (y/y) | 10.00 | -0.7%(-5.1%)p | -0.7%(-5.1%) | -0.7%(-5.1%) |
Employment (y/y) | 10.00 | +1.0%(-2.1%) | +1.0%(-2.1%) | +0.3%(-2.0%) |
Jobs growth despite economic contraction
Euro-zone employment is likely to have edged up in the final three months of 2020, despite renewed restrictions and the fall in economic activity.
We see little reason to expect a significant revision to the so-called “preliminary flash” estimate that euro-zone GDP fell by 0.7% q/q in Q4.
The monthly labour market data suggest that employment increased by about 0.5% q/q in Q4. National measures show that employment in Spain rose by 1.2% q/q, but suggest it stagnated in Germany and France. Overall, the country data available point to a rise of about 0.3%, which would leave employment down 2% in year-on-year terms.
But it has been a poor start to 2021. Virus restrictions have been extended and tightened throughout much of the region, while the vaccine rollout has been slow to get going. So we expect another drop in euro-zone GDP in Q1.
Short-time work schemes, as well as bans on dismissals in some countries, will protect jobs. But the business surveys suggest that the outlook for the labour market remains downbeat. (See Chart 3.)
Chart 3: EZ Firms’ Hiring Intentions & Employment |
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Source: Refinitiv |
Euro-zone Consumer Confidence (Feb.) Thu. 18th Feb.
Forecasts | Time (GMT) | Previous | Median | Capital Economics |
Consumer Confidence | 15.00 | -15.5 | -15.0 | -16.0 |
Still depressed
The European Commission’s (EC’s) measure of euro-zone consumer confidence probably fell again in February as vaccine progress remained limited and fear of new variants spread.
Consumer confidence fell in January, from -13.8 in December to -15.5, as tighter restrictions, the virus’ faster spread and a new threat emerging from the UK variant weighed on sentiment.
Since then, France shut big shopping malls, Germany extended its lockdown but Italy eased measures as did some Spanish regions as daily infections fell back. Despite this, the timelier TR/Ipsos Primary Consumer Sentiment Indices show that sentiment improved in Germany in February, as it did in Spain. Meanwhile, sentiment fell in Italy, France and particularly sharply in Belgium. A weighted average of these indices suggests the EC measure will have remained more or less unchanged. But these surveys painted a similar picture last month yet the EC confidence index still fell. So we have again pencilled in a small fall to
-16.0. (See Chart 4.) All told, the recent extension of lockdowns across the bloc suggest that almost certainly contracting in Q4, spending will have fallen at the start of this year too.
Chart 4 : Euro-zone EC Consumer Confidence |
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Sources: Refinitiv, Capital Economics |
Euro-zone Flash Composite PMI (Feb.) Fri. 19th Feb.
Forecasts | Time (GMT) | Previous | Median | Capital Economics |
Composite PMI | 09.00 | 47.8 | 48.0 | 48.0 |
Another below-50 reading
The Composite PMI is very likely to have remained below 50 in February as activity remains depressed.
The lockdowns in place over the past few months have had a far bigger impact on mobility than on economic activity. (See Chart 5.) There are a few reasons for that, such as the restrictions being focused on limiting social interaction rather than business closures, and some services firms being better adapted to working from home. What’s more, the Composite PMI does not include the retail sector, which has been more heavily affected than most by recent restrictions.
The rules in place across the region have been tinkered with this year, some being tightened and others loosened, but the big picture is that economic activity is still very low. We have pencilled in a broadly unchanged reading for the euro-zone Composite PMI of 48.0 for February.
Chart 5: Euro-zone Composite PMI |
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Sources: Capital Economics, Markit |
Economic Diary & Forecasts
Date | Country | Release/Indicator/Event | Time CET | Time (GMT) | Previous* | Median* | CE Forecasts* | |
Sun 14th |  | Spa | Catalonia Regional Elections | – | – | – | – | – |
Mon 15th |  | EZ | Trade Balance (Dec, sa) | 11.00 | (10.00) | +€25.1bn | – | – |
| EZ | Industrial Production (Dec) | 11.00 | (10.00) | +2.5%(-0.6%) | -0.5%(-0.2%) | -1.5%(-0.6%) | |
| EZ | Eurogroup Meeting | 15.00 | (14.00) | – | – | – | |
Tue 16th |  | Fra | Unemployment Rate (Q4) | 07.30 | (06.30) | 9.0% | 9.2% | – |
 | Net | GDP (Q4, Prov., q/q(y/y) | 09.30 | (08.30) | +7.8%(-2.5%) | +0.5% | +0.5%(-2.4%) | |
| EZ | Employment (Q4, Prov., q/q(y/y) | 11.00 | (10.00) | +1.0%(-2.3%) | – | +0.3%(-2.0%) | |
| EZ | GDP (Q4, 2nd Est. q/q(y/y) | 11.00 | (10.00) | -0.7%(-5.1%)p | -0.7%(-5.1%) | -0.7%(-5.1%) | |
Wed 17th | | EZ | Construction Output (Dec) | 11.00 | (10.00) | +1.4%(-1.3%) | – | – |
Thu 18th |  | Ire | CPI (Jan, EU Harm.) | 12.00 | (11.00) | +0.2%(-1.0%) | – | – |
| EZ | ECB account of 20th-21st Feb. policy meeting | 13.30 | (12.30) | – | – | – | |
| EZ | Consumer Confidence (Feb, Flash) | 16.00 | (15.00) | -15.5 | -15.0 | -16.0 | |
| EZ | ECB’s Schnabel online guest lecture | 17.15 | (16.15) | – | – | – | |
Fri 19th | | Fra | CPI (Jan, EU Harm., Final) | 08.45 | (07.45) | +0.3%(+0.8%)p | +0.3%(+0.8%) | +0.3%(+0.8%) |
| Fra | Markit Composite PMI (Feb, Flash) | 09.15 | (08.15) | 47.7 | 51.0 | – | |
 | Ger | Markit/BME Composite PMI (Feb, Flash) | 09.30 | (08.30) | 50.8 | 56.5 | – | |
| EZ | Markit Manufacturing PMI (Feb, Flash) | 10.00 | (09.00) | 54.8 | 54.3 | 55.0 | |
| EZ | Markit Services PMI (Feb, Flash) | 10.00 | (09.00) | 45.4 | 45.9 | 45.5 | |
| EZ | Markit Composite PMI (Feb, Flash) | 10.00 | (09.00) | 47.8 | 48.0 | 48.0 | |
 | Ita | CPI (Jan, EU Harm., Final) | 10.00 | (09.00) | +0.5%(+0.5%)p | – | – | |
Selected future data releases and events | ||||||||
Mon 22nd | | Ger | Ifo Survey (Feb) | 10.00 | (09.00) | 90.1 | – | – |
Tue 23rd | | EZ | CPI (Jan, Final) | 11.00 | (10.00) | +0.2%(-0.3%)p | – | +0.2%(-0.3%) |
Wed 24th | | Ger | GDP (Q4, Final, q/q(y/y) | 08.00 | (07.00) | +0.1%(-2.9%)p | – | – |
Thu 25th | | EZ | M3 Money Supply (Jan) | 10.00 | (09.00) | +1.4%(+12.3%) | – | – |
| EZ | EC Business & Consumer Survey | 11.00 | (10.00) | 91.5 | – | – | |
Fri 26th | | Fra | GDP (Q4, Final, q/q(y/y)) | 08.45 | (07.45) | -1.3%(-5.0%)p | – | – |
 | Por | GDP (Q4, Final, q/q(y/y)) | 12.00 | (11.00) | +0.4%(-5.9%)p | – | – | |
*m/m(y/y) unless otherwise stated. p=provisional. Sources: Bloomberg, Capital Economics | ||||||||
Main Economic & Market Forecasts | ||||||||||
%q/q(%y/y) unless stated | Latest | Q4 2020 | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | 2019 | 2020 | 2021 | 2022 |
GDP | -0.7(-5.1) | -0.7(-5.1) | -0.5(-2.7) | +2.2(+12.6) | +2.2(+2.3) | +1.1(+5.0) | +1.3 | -6.8 | +4.0 | +4.0 |
Household Spending | +14.0(-4.6) | -2.5(-7.0) | -0.7(-3.4) | +2.5(+13.1) | +2.4(+1.6) | +1.8(+6.1) | +1.3 | -7.9 | +4.1 | +4.8 |
HICP (%y/y) | +0.9 (Jan) | -0.3 | 0.9 | 1.6 | 1.8 | 2.2 | +1.2 | +0.3 | +1.6 | +0.7 |
Unemployment Rate (%) | 8.3 (Dec) | 8.4 | 8.6 | 8.8 | 8.6 | 8.4 | 7.6 | 8.0 | 8.5 | 8.0 |
Depo Rate, end period (%) | -0.50 | -0.50 | -0.50 | -0.50 | -0.50 | -0.50 | -0.50 | -0.50 | -0.50 | -0.50 |
10yr Bund Yield, end period (%) | -0.46 | -0.58 | -0.47 | -0.48 | -0.49 | -0.50 | -0.19 | -0.58 | -0.50 | -0.25 |
$/euro, end period | 1.21 | 1.22 | 1.22 | 1.23 | 1.24 | 1.25 | 1.12 | 1.22 | 1.25 | 1.25 |
£/euro, end period | 0.88 | 0.89 | 0.87 | 0.87 | 0.87 | 0.86 | 0.85 | 0.88 | 0.86 | 0.86 |
Sources: Bloomberg, Capital Economics | ||||||||||
Jack Allen-Reynolds, Senior Europe Economist, jack.allen-reynolds@capitaleconomics.com