Fast-spreading virus, slow vaccinations - Capital Economics
European Economics

Fast-spreading virus, slow vaccinations

European Economics Weekly
Written by Andrew Kenningham
The economy withstood the second lockdowns comparatively well in November and December. But rising virus numbers and the painfully slow start to the vaccination rollout mean that the region is starting the year on the back foot. We expect GDP to contract slightly in the first quarter.

The number of new coronavirus cases came down in many countries before Christmas as a result of the tighter restrictions in place. But since then, things have taken a turn for the worse. New cases have been increasing at the beginning of the year in France, Italy and Spain. What’s more, Germany did not manage to reduce the number of cases before the holiday period and has suffered a steady rise in the hospitalisations and fatalities. (See here.)

As a result, governments have deferred any easing of restrictions and in some cases have tightened the rules. For example, Germany has decided to keep its measures in place until at least the end of January and has introduced a 15km limit on travel in much of the country. The number of new daily cases is still running at more than double the 50 per 100,000 ceiling which the government is aiming for. So there is a significant risk that measures will be tightened further in the coming weeks.

With new virus cases rising, hopes are being pinned on the vaccine rollout even more than previously. Unfortunately, the EU has been slow out of the starting blocks: the front-runners have vaccinated around 0.5% of their populations (see Chart 1), compared to 2% in the UK and US and 17% in Israel.

Chart 1: Vaccinations (% of Population)

Sources: Bloomberg, Capital Economics

Thankfully, there have been some encouraging developments. The approval of Moderna’s vaccine by the European Medicines Agency this week should help, particularly as it does not need to be stored at the ultra-cold temperatures required for the Pfizer vaccine. And the EU has doubled its order of Pfizer jabs to 600mn with 75mn to be delivered during Q2. (That said, the schedule for delivery is too opaque for us to know whether this is an acceleration from what was previously expected.)

Overall, we remain cautiously optimistic that most governments will make enough progress towards vaccinating the vulnerable population to be able to lift many of the restrictions in Q2, albeit perhaps later in that quarter than we had initially assumed. So we still expect strong increases in GDP in Q2 and Q3.

“Good news” about Q4

There has also been some positive news this week about how well the economy withstood the lockdowns at the end of last year. Germany recorded an increase in both retail sales and industrial production in November despite the lockdown there coming into effect that month. We now expect German GDP to have increased in Q4 which will limit any fall in GDP for the euro-zone as a whole to less than the 3% q/q fall we had previously anticipated.

Meanwhile, inflation remained stuck at very low levels in December: we expect it to rise in the coming months but core inflation will probably remain below 1% for the foreseeable future. And the euro-zone unemployment rate fell further, from 8.4% in October to 8.3% in November – although this was flattered by a rise in inactivity as tighter restrictions prevented people from being available for work. Government support will keep a lid on unemployment in the early part of 2021, but we then expect the measured number of jobless people to rise as people return to the labour force and governments make short-time working less generous.

The week ahead

In a thin week for economic statistics the most significant data will be industrial production for the euro-zone and German GDP for 2020. We will also look at the account of the December ECB monetary policy meeting (on Thursday) and of course the daily virus and vaccination numbers.


Data Previews

Euro-zone Industrial Production (Nov.) Wed. 13th Jan.

Forecasts

Time (GMT)

Previous

Median

Capital Economics

Industrial Production m/m (y/y)

10.00

+2.1%(-3.8%)

+0.2%(-3.4%)

+0.3%(-3.1%)

Industrial production rose in Q4

Euro-zone industrial production is likely to have edged up further in November, leaving it set for another healthy increase over Q4.

After collapsing in March and April, industrial output rose in every month from May to October, leaving it 3.5% below its pre-pandemic level. The national data published so far for November show that output fell in France (-0.9%) and the Netherlands (-0.2%), but rose in Germany (+0.8%) and Finland (+0.6%). A weighted average of these outturns points to an increase of about 0.3% in the euro-zone as a whole.

If the level of production was unchanged in December, then it would have risen by 2.5% q/q in Q4. That would add about 0.5% to GDP. And the business surveys suggest that production will have increased in December (see Chart 2), adding even more to GDP. It now seems likely that the euro-zone economy will have shrunk only slightly in Q4.

Chart 2: Euro-zone Industrial Production
& Manufacturing Output PMI

Sources: Refinitiv, Markit


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time CET

Time (GMT)

Previous*

Median*

CE Forecasts*

Mon 11th

Spa

Industrial Production (Nov)

09.00

(08.00)

+1.0%(-1.6%)

Tue 12th

Net

CPI (Dec, EU Harm.)

06.30

(05.30)

-1.2%(+0.7%)

Wed 13th

Ita

Industrial Production (Nov)

10.00

(09.00)

+1.3%(-5.1%)

EZ

Industrial Production (Nov)

11.00

(10.00)

+2.1%(-3.8%)

+0.2%(-3.4%)

+0.3%(-3.1%)

Thu 14th

Ger

GDP (2020)

10.00

(09.00)

(+0.6%)

(-5.0%)

(-5.8%)

Gre

CPI (Dec, EU Harm.)

11.00

(10.00)

-1.0%(-2.1%)

Ire

CPI (Dec, EU Harm.)

11.00

(10.00)

+0.3%(-1.0%)

Fri 15th

Fra

CPI (Dec, EU Harm., Final)

08.45

(07.45)

+0.2%(+0.0%)p

+0.2%(+0.0%)

+0.2%(+0.0%)

Spa

CPI (Dec, EU Harm., Final)

09.00

(08.00)

+0.1%(-0.6%)p

+0.1%(-0.6%)

EZ

Trade Balance (Nov, sa, EUR)

11.00

(10.00)

+25.9bn

Selected future data releases and events

Mon 18th

Ita

CPI (Dec, EU Harm., Final)

10.00

(09.00)

+0.2%(-0.3%)p

+0.2%(-0.3%)

Tue 19th

Ger

CPI (Dec, EU Harm., Final)

08.00

(07.00)

+0.6%(-0.7%)p

+0.6(-0.7%)

Ger

ZEW Economic Sentiment (Jan)

11.00

(10.00)

55

Thu 21st

EZ

ECB Interest Rate Announcement

13.45

(12.45)

-0.50%

-0.50%

Fri 22nd

EZ

Markit Composite PMI (Jan, Prov.)

10.00

(09.00)

49.1

EZ

Markit Services PMI (Jan, Prov.)

10.00

(09.00)

46.4

EZ

Markit Manufacturing PMI (Jan, Prov.)

10.00

(09.00)

55.2

*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

+12.5(-4.3)

-3.0(-7.3)

+0.8(-2.9)

+2.9(+13.2)

+2.7(+3.3)

+0.8(+7.3)

+1.3

-7.5

+5.0

+4.0

Household Spending

+14.0(-4.6)

-4.0(-8.5)

+1.6(-2.6)

+3.5(+15.0)

+2.2(+3.2)

+0.7(+8.2)

+1.3

-8.2

+5.6

+3.6

HICP (%y/y)

-0.3 (Nov)

-0.2

0.2

0.9

1.1

1.2

+1.2

+0.3

+0.8

+0.8

Unemployment Rate (%)

8.4 (Oct)

8.5

9.3

9.1

8.9

8.6

7.6

7.8

9.0

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 (%)

-0.52

-0.50

-0.50

-0.50

-0.50

-0.50

-0.19

-0.50

-0.50

-0.50

$/euro, end period

1.22

1.20

1.21

1.23

1.24

1.25

1.12

1.20

1.25

1.30

£/euro, end period

0.90

0.89

0.89

0.89

0.89

0.89

0.85

0.89

0.89

0.90

Sources: Bloomberg, Capital Economics


Andrew Kenningham, Chief Europe Economist, andrew.kenningham@capitaleconomics.com