Eurozone poised for strong recovery as economic climate increases
The eurozone economy is expected to experience a strong recovery in the second half of 2021, as the economic climate jumped in April after the region’s immunization program finally gained momentum.
The European Commission’s monthly sentiment survey for the 19 euro-sharing countries was more optimistic on Thursday, rising to 110.3 points in April from 100.9 in March.
The optimistic mood came when European Central Bank President Christine Lagarde said the eurozone economy was expected to grow rapidly in the second half of the year thanks to faster vaccine distribution, which will enable the life to return to normal.
UBS Global Wealth Management said immunization progress suggests the euro zone will not be far behind the United States and the United Kingdom on easing restrictions.
“We continue to expect the euro area economy to experience a strong recovery in the second half of this year,” UBS said.
“An additional boost for euro area activity will likely come from its exposure to the global economic rebound.”
That sentiment was supported by Ms Lagarde, who said at an Aspen Security Forum online event on Wednesday that she was optimistic about the economy.
“Obviously, it appears that by the end of June, around 70 percent of the population should be vaccinated with at least the first vaccine,” Ms. Lagarde said.
Eurozone output contracted 6.6% in 2020 after the region was hit by the pandemic. The recovery of the economic bloc was hampered by a third wave of coronavirus and a random start of its vaccination campaign.
But Ms Lagarde said vaccines provide “light at the end of the tunnel”, so there was no reason to change the ECB’s projections for 4 percent full-year growth.
The ambitious Nest Generation EU plan is gaining momentum, with a number of Member States submitting their national recovery plans to the European Commission this week to receive the first disbursements of the € 750 billion recovery and resilience plan ($ 908.06 billion) from the EU.
Italy’s economy and healthcare system have been severely affected by the pandemic, with the country set to receive one of the largest shares of the fund unveiled last year to help member states recover from the crisis.
This week Italian Prime Minister Mario Draghi said the country’s fate depends on the success of the € 248 billion investment and reform package to repair his country’s economy, including € 191.5 billion come from European funds.
Morgan Stanley said Thursday that Italy’s stimulus package could put its economy on a sustained growth path, although the short-term effects are more uncertain.
“The package has the potential to significantly increase Italian GDP growth in the medium term for at least two reasons. First, the plan aims to fund new, high-yield, long-term investment projects, namely infrastructure investments with a green or digital label, ”Morgan Stanley said.
“Second, the potential of the plan is further enhanced by the significant slowdown in the Italian economy. We believe that increasing public investment has the capacity to attract private investment and consumption, especially if the government succeeds in adopting the supply-side structural reforms included in the plan, which aim to reduce bureaucracy. and make the country more business friendly. “
France and Germany jointly presented their national recovery plan with grants of around 25 billion euros and 40 billion euros respectively, which will largely focus on a greener economy and the progress of digitization.
“With Germany spending 90 percent and France 75 percent on these two issues, both countries are exceeding the requirements set by the European Commission,” UBS said.
“In the near term, we expect the market response to these plans to be broadly favorable. The lack of delay in the deployment of funds should give greater credibility to the expected economic recovery of Europe. “
However, the euro zone economy still has its work cut out for it. Less than a quarter of the bloc’s population has received their first dose of vaccine and much of Europe remains stranded.
Services, which incorporates the sectors most affected by lockdowns, suffered the most of the impact, while goods production fared much better, helped in part by strong demand from abroad.
“Nonetheless, many parts of the eurozone’s manufacturing sector continue to operate below capacity. Supply chain disruptions, bottlenecks caused by shipping delays and the continued impact of social distancing have all contributed, ”UBS said.
With vaccine supply bottlenecks set to ease in the coming months, the mood has become much more positive.
The European Commission’s monthly sentiment survey revealed that industrial confidence rose to 10.7 points in April from 2.1 in March.
In services, the largest sector in the euro area responsible for more than two-thirds of GDP, the mood was also more optimistic with a reading rising to 2.1 points against minus 9.6 in March.
Consumer optimism fell from minus 10.8 to minus 8.1, while manufacturing industry selling price forecasts rose to 24.1 points in April from 17.5 in March, approaching their highest level since March 2011.
The rebound in economic confidence has added to signs that the region is starting to recover, with the German government raising its growth forecast for the year to 3.5% this week to 3.5% and expressing confidence that consumer spending will go down. take off once the pandemic is under control.
The positive mood will boost the outlook for the euro against a weaker US dollar this year. The euro was trading at $ 1.2119 against the dollar at 2:06 p.m. London time on Thursday, with USB expecting the pairing to reach $ 1.25 by the end of the year.
“As the global economy heals, investors are likely to diversify their current exposure to the US dollar,” the bank said.
“The corresponding increase in demand for exports from the euro area will create additional demand for the euro, which will be another factor pushing the currency higher.”
Find out more about the euro area economy
Christine Lagarde of the ECB: “ Our hope is that 2021 will always be the year of recovery ”
Euro zone unemployment unchanged at 8.3% in February
Euro area GDP contracted by 0.7% in the fourth quarter of 2020