Don’t get carried away with Draghi - Capital Economics
European Economics

Don’t get carried away with Draghi

European Economics Weekly
Written by Jack Allen-Reynolds
Italy’s government of national unity looks set to have a hefty majority, making it more stable and putting it in a better position to pass fiscal measures and reforms. But we wouldn’t get carried away about the prospects of it turning the economy around. Next week, the account of January’s ECB meeting might provide more information on how policymakers’ assess “financing conditions”, and we suspect that the flash PMIs for February will remain below 50.

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)

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)

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

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

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
& CE Mobility Tracker

Sources: Capital Economics, Markit


Economic Diary & Forecasts

Upcoming Events and Data Releases

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