Poor start to vaccine rollout poses risks to recovery - Capital Economics
European Economics

Poor start to vaccine rollout poses risks to recovery

European Economics Weekly
Written by Andrew Kenningham
A decline in GDP in Q1 now seems highly likely, but the bigger concern is that slow vaccination programmes and concerns about virus variants may delay the lifting of restrictions in Q2 and beyond. Meanwhile, we expect confirmation next week that GDP contracted in Q4, and we should learn more about January’s “inflation shock”.

No sooner had we put the final touches to our quarterly Outlook than some of the downside risks to our forecasts have begun to materialise. Our prediction of a brisk recovery in GDP beginning in the second quarter was based on two assumptions: (i) that the vaccine rollout would go reasonably smoothly; and (ii) that governments would begin lifting the more significant restrictions soon after most vulnerable people had been inoculated. Both are now looking questionable.

First, the vaccination programme has made a rocky start, to put it mildly. Regulatory approval has been slow with the AstraZeneca vaccine, for example, only set to be approved today. EU countries have vaccinated just 2% of their populations compared to 8% in the US and 12% in the UK. (See Chart 1.) And the rollout has been put on pause in Madrid and Lisbon, among other places, due to supply shortfalls.

Chart 1: Vaccinations (29th Jan., % of Population)

Source: Our World in Data

Moreover, Pfizer has warned that supply will not match the original schedule and AstraZeneca has said it will deliver less than half the originally planned doses in the first quarter, and this in turn has sparked political disputes. Meanwhile, there are concerns that vaccines are not going to priority groups (e.g. in Italy, where non-frontline health-workers seem to have been prioritised), and vaccine hesitancy has slowed the rollout in France.

Secondly, and perhaps more ominously, changes to the virus itself may discourage politicians from lifting restrictions promptly. New variants identified in the UK, Brazil and South Africa are more transmissible. And the vaccines appear to be less effective against some variants. Even if the variants found so far turn out to be manageable, the fact that the virus mutates more readily than had initially been anticipated adds to the case for caution in lifting restrictions, particularly on cross-border travel. The prospect of travel bans, vaccine passports and compulsory isolation for tourists could put the kibosh on our forecasts (not to mention our own dreams!) for catch-up summer holidays later in the year.

All this means the recovery may begin later and be more gradual than we had anticipated. For now, we are not changing our published forecasts for euro-zone GDP to increase by 4% this year and next, following a 7% decline last year. After all, things could turn around quickly once the new Pfizer plant is online. And for all the furore about AstraZeneca, it was not due to be a big supplier to the EU until the summer. But the risks are tilted to the downside. As we have warned elsewhere, GDP may contract more than we had suggested in Q1, but the bigger concern is for the second and third quarters.

Surprise!

There is not space here to recap on all the data released over the past couple of days, but two main themes are worth highlighting. First, the fact that the economy proved more resilient than anticipated in Q4 may suggest that businesses and households are increasingly adapting to life in a pandemic. If so, the fallout from future lockdowns on activity may be more muted than it was before. And second, the rise in inflation in Germany and Spain in January may pose a threat to our low inflation forecasts.

The week ahead

The data will keep coming next week. We will learn more about how widespread the increase in inflation was in January and get confirmation that euro-zone GDP contracted in Q4, teeing things up for a double-dip pandemic recession. We also expect to learn that the euro-zone jobless rate was stable in December while retail sales rose, but Italy and Spain’s PMIs probably fell in January.


Data Previews

EZ Unemployment Rate (Dec.) Mon. 1st Feb.

Forecasts

Time (GMT)

Previous

Median

Capital Economics

Euro-zone Unemp. Rate (Oct.)

10.00

8.3%

8.3%

8.3%

Steady rate at the end of 2020

We think that the euro-zone unemployment rate held steady in December 2020 as short-time work schemes cushioned the blow from lockdowns.

The unemployment rate has been on a steady downward trend since last summer, when it peaked at 8.7%. But country data already published suggest that a further fall in December is unlikely. Admittedly, the number of people out of work fell in both Germany and the Netherlands and was stable in France. But unemployment increased in Spain and probably in Italy too. So on balance we think that the unemployment rate was probably unchanged at 8.3% in December.

Looking ahead, though, the tightening of measures throughout much of the euro-zone in early 2021 does not bode well. And hiring activity remains subdued. (See Chart 2.)

A surge in unemployment is unlikely because governments have extended their short-time working schemes. And with the vaccine rollout now underway, albeit slowly, the demand for labour should revive. We still expect the unemployment rate to rise further in the coming six months or so, to peak just below 9% before gradually coming down.

Chart 2: Employment PMI & Employment

Sources: Refinitiv, Markit

Euro-zone & Italian GDP (Q4) Tue. 2nd Feb.

Forecasts

Time (GMT)

Previous

Median

Capital Economics

Italian GDP q/q (y/y)

09.00

+15.9% (-5.0%)

-2.2%

-2.0% (-6.6%)

Euro-zone GDP q/q (y/y)

10.00

+12.5% (-4.3%)

-1.7% (-6.1%)

-1.0% (-5.4%)

Euro-zone GDP to shrink in Q4 and Q1

We think that the euro-zone economy contracted by about 1% in Q4 and that it will shrink again in Q1.

Data published this week for some of the region’s biggest economies suggest that euro-zone GDP is almost certain to have fallen in Q4. Small increases in GDP in Germany and Spain will have been more than offset by declines elsewhere. (See here.)

Italy’s fourth quarter data have not yet been published, but the official monthly data show that retail sales fell and, unlike in almost every other euro-zone country, industrial production is likely to have declined too. We have pencilled in a 2% q/q fall, which would leave the contraction in the euro-zone at around 1%. (See Chart 3.)

Looking ahead, the economy is likely to shrink again in Q1 and the risk is rising that it won’t recover as quickly in Q2 and beyond as our forecasts imply.

Chart 3: GDP (% q/q)

Sources: Refinitiv, Capital Economics

Euro-zone Flash HICP (Jan.) Wed. 3rd Feb.

Forecasts

Time (GMT)

Previous

Median

Capital Economics

HICP m/m (y/y)

10.00

+0.3% (-0.3%)

(+0.4%)

+0.4% (+1.2%)

Core HICP m/m (y/y)

10.00

+0.4% (+0.2%)

(+0.7%)

-1.0% (+1.0%)

Inflation to jump

We think the headline HICP inflation rate probably jumped to around 1.2% in January and the core rate, excl. food, energy, alcohol and tobacco, to 1.0%.

After five months of negative headline inflation, and four during which it was stable at -0.3%, there will be a big change in January. HICP inflation in Germany jumped from -0.7% in December to +1.6% (!). This was partly due to the reversal of a previous VAT cut and to changes in the HICP basket weights. (See here.) But without a full breakdown the full explanation remains elusive. Based on the past relationship between the German and euro-zone inflation rates, this points to a rise in the euro-zone figure to around 1.5%. (See Chart 4.)

HICP inflation in Spain also rose sharpy, but less so than in Germany (from -0.6% to +0.6%) between December and January. And in Portugal, it rose from -0.3% to +0.2%. Our best guess is that there has been some upward pressure on inflation from changes in the HICP basket throughout the region, so we have assumed a modest rise in other countries.

Headline inflation should rise further during the first half of the year as the drag from the past falls in oil prices drops out of the annual comparison and prices of tourism-related services begin to rise.

Chart 4: German and Euro-zone HICP Inflation

Sources: Refinitiv, Capital Economics

Euro-zone Retail Sales (Dec.) Thu. 4th Feb.

Forecasts

Time (GMT)

Previous

Median

Capital Economics

Euro-zone Retail Sales m/m (y/y)

10.00

-6.1% (-2.9%)

+3.0%

+2.5%(+0.3%)

Partial rebound after November’s closures

Euro-zone retail sales are likely to have rebounded in December, largely as a result of France re-opening non-essential shops. But tighter restrictions point to a poor start to 2021.

In November, euro-zone retail sales fell by 6.1% m/m, due to the closures of non-essential shops in several countries including France. In general, these were re-opened for much if not all of December. The national data show jumps in retail sales in France and Ireland, and a small rise in Spain. However, Germany and Netherlands closed their shops in mid-December. In the Netherlands, we already know that this caused a 10.9% m/m drop in retail sales. Overall, we think that euro-zone retail sales might have risen by about 2.5% m/m in October, leaving sales still slightly below their pre-pandemic level. (See Chart 5.)

Retail will clearly make a very weak start to 2021, given the substantial restrictions that are now in place throughout the region.

Chart 5: Euro-zone Retail Sales (Feb. 2020 = 100)

Sources: Refinitiv, Capital Economics


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time CET

Time (GMT)

Previous*

Median*

CE Forecasts*

Mon 1st

Spa

Markit Manufacturing PMI (Jan)

09.15

(08.15)

51.0

Ita

Markit Manufacturing PMI (Jan)

09.45

(08.45)

52.8

Ita

Unemployment Rate (Dec, Prov.)

10.00

(09.00)

8.9%

EZ

Markit Manufacturing PMI (Jan, Fin)

10.00

(09.00)

54.7p

54.7

54.7

EZ

Unemployment Rate (Dec)

11.00

(10.00)

8.3%

8.3%

8.3%

Tue 2nd

Ger

Retail Sales (Dec)

08.00

(07.00)

+1.9%(+5.6%)

-2.3%(+4.7%)

Fra

CPI (Jan, Prov., EU Harm.)

08.45

(07.45)

+0.2%(+0.0%)

Spa

Change in Unemployment (Jan)

09.00

(08.00)

+36,800

Ita

GDP (Q4, Prov, q/q(y/y))

10.00

(09.00)

+15.9%(-5.0%)

-2.2%

-2.0%(-6.6%)

Por

GDP (Q4, Prov., q/q(y/y))

10.30

(09.30)

+13.3%(-5.7%)

-3.0%(-9.2%)

EZ

GDP (Q4, Prel. Flash Est., q/q(y/y))

11.00

(10.00)

+12.5%(-4.3%)

-1.7%(-6.1%)

-1.0%(-5.4%)

Wed 3rd

Spa

Markit Composite PMI (Jan)

09.15

(08.15)

48.7

47.0

Ita

Markit Composite PMI (Jan)

09.45

(08.45)

43.0

42.0

Fra

Markit Composite PMI (Jan, Fin.)

09.50

(08.50)

47.0p

47.0

Ger

Markit Composite PMI (Jan, Fin.)

09.55

(08.55)

50.8p

50.8

50.8

EZ

Markit Composite PMI (Jan, Fin)

10.00

(09.00)

47.5p

47.5

47.5

Ita

CPI (Jan, Prov, EU Harm.)

11.00

(10.00)

+0.2%(-0.3%)

(+0.0%)

EZ

PPI (Dec)

11.00

(10.00)

+0.4%(-1.9%)

EZ

CPI (Jan, Prov.)

11.00

(10.00)

+0.3%(-0.3%)

(+0.4%)

+0.4% (+1.2%)

EZ

Core CPI (Jan, Flash)

11.00

(10.00)

+0.4%(+0.2%)

(+0.7%)

-1.0% (+1.0%)

Thu 4th

EZ

ECB Economic Bulletin

10.00

(09.00)

EZ

Retail Sales (Dec)

11.00

(10.00)

-6.1%(-2.9%)

+3.0%

+2.5%(+0.3%)

Fri 5th

Ger

Factory Orders (Dec)

08.00

(07.00)

+2.3%(+6.3%)

-1.9%(+3.7%)

Ita

Retail Sales (Dec)

10.00

(09.00)

-6.9%(-8.1%)

Selected future data releases and events

Mon 8th

Ger

Industrial Production (Dec)

08.00

(07.00)

+0.9%(-2.6%)

Fri 12th

EZ

Industrial Production (Dec)

11.00

(10.00)

+2.5%(-0.6%)

*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)

-1.0(-5.4)

-0.5(-2.7)

+2.2(+12.6)

+2.2(+2.3)

+1.1(+5.0)

+1.3

-7.0

+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)

-0.3 (Dec)

-0.3

0.0

0.7

0.9

1.3

+1.2

+0.3

+0.8

+0.8

Unemployment Rate (%)

8.3 (Nov)

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 (%)

-0.50

-0.58

-0.50

-0.50

-0.50

-0.50

-0.19

-0.58

-0.50

-0.50

$/euro, end period

1.21

1.22

1.22

1.23

1.24

1.25

1.12

1.22

1.25

1.30

£/euro, end period

0.89

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