Sunday, April 18, 2021

Deployment of Covid vaccine fuels hopes of record growth in euro area in 2021

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The euro area economy will grow next year at its fastest pace since the launch of the single currency more than two decades ago, according to a Financial Times poll of economists which said the largest risk was if vaccines fail to stop the coronavirus pandemic.

As European countries begin to vaccinate people against Covid-19, the 33 economists interviewed by the FT this month predicted that eurozone gross domestic product is set to increase an average of 4.3 percent next year, rebounding from this year’s record post-war recession.

This is more optimistic than the 3.9% of the European Central Bank provide released this month, but below the 5.2% the IMF predicted in October.

“The vaccines will restore normal conditions for most services,” said Daniel Gros, director of the Center for European Policy Studies. “There are no fundamental financial imbalances to hold back demand or investment. Consumers will have cash to meet pent-up demand. “

However, most economists expect the pandemic to leave significant scars, with more than half predicting unemployment in the 19-country bloc will rise above 10 percent for the first time in more than four years, from 8.4 percent in October.

“As we forecast above-potential growth in the coming years, we expect second-round effects in labor market and credit flows to weigh on the recovery for a significant period,” said Anatoly Annenkov, economist at Société Générale.

Two-thirds of economists surveyed believe that euro area GDP will not return to its pre-pandemic level until mid-2022 at the earliest, with a handful – including Mr Annenkov – claiming that will only happen. in 2023. Their forecasts for growth in the euro zone for next year vary from 1.5% to only 6%.

Lockdowns and travel restrictions to contain the spread of the virus are expected to drag the euro zone into a double dip recession This winter.

How did last year’s predictions go?

Covid-19 has derided economists’ forecasts for 2020.

On average, economists predicted to the FT that eurozone growth would fall below 1 percent this year – the slowest rate in seven years. It sounded bad at the time, but it was nowhere near as bleak as the 7.3% contraction the ECB is now estimating.

Unsurprisingly, economists did not expect the ECB to launch further stimulus or for Germany to move away from its long-standing support for balanced budgets – both triggered by the economic impact of the pandemic .

Respondents correctly predicted headline inflation would drop this year, but none expected it could drop to the 0.2 percent the ECB is now expecting.

However, most economists expect that by the second half of next year, a widespread vaccination and an increase in the EU recovery fund of 750 billion euros will cause a rebound of type ” Roaring Twenties ”- similar to the one that followed the Spanish flu pandemic a century ago.

“We will see a surprise story of economic growth,” said Nick Bosanquet, professor of health policy at Imperial College London, predicting “a sharp rise in consumption”.

While many economists believe eurozone banks will experience a surge in NPLs next year, most do not expect a repeat of the banking crisis that swept through the bloc after the 2008 financial crisis.

Lucrezia Reichlin, professor of economics at the London Business School, said the biggest risk to the economy was that the EU stimulus fund “fails to generate growth in fragile countries with consequences for the economy. the dynamics of public debt, in particular in Italy ”.

Inflation in the euro area has turned negative in recent months, but one-off factors are partly to blame and economists on average predicted overall price growth to rise to almost 1 percent next year, although still well below the ECB’s target just under 2 percent.

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