Eurozone GDP Set to Contract during first Quarter of 2021

Eurozone Gross Domestic Product (GDP) experienced substantial growth during Q3 of 2020, seeing a 12.5% increase compared to the previous quarter. However, a negative outlook with regard to COVID-19 saw a contraction during Q4, with ING now downgrading their outlook for Eurozone GDP in 2021.

With regard to December’s disappointing activity and data, Chris Williamson at IHS Markit stated that “service sector activity, in particular, fell more sharply than estimated by the earlier ’flash’ PMI estimate, as more countries stepped up their fights against rising virus case numbers.”

“While the data indicated a renewed decline in Eurozone GDP in Q4, the downturn appears to have been far less severe than seen in the second quarter, thanks to sustained strong manufacturing growth, rising global trade and lockdowns having been less onerous than earlier in the year.”

Rises in COVID-19 figures across Europe have caused many countries to tighten lockdown restrictions to curb the spread of infection. With coronavirus restrictions continuing into the beginning of 2021, Europe’s economy has had a bleak start to the year. ING predicts that Q1 will see negative growth, with Q2 potentially following suit.

Coronavirus struggles within the Eurozone mean that ING has downgraded their GDP forecast for 2021 to 3%, as it’s thought that 2022 will see growth of 3.5%. As a result, it’s likely that the Eurozone economy will not return to pre-pandemic levels until 2023.

Fears of double dip recession

The extension of coronavirus lockdowns across the Eurozone, have sparked fears of a double dip recession. Many businesses have been forced to shut their doors, with consumer activity coming to a halt. Figures from Fable Data indicate that consumer spending was down 25% during the second week of January, year-on-year, with spending taking a hit on all areas with the exception of groceries.

The European Central Bank (ECB) has pledged to inject EUR 1.85 trillion into the economy, extending the stimulus programme for 9 months. However, many economists are of the belief that the ECB’s fiscal measures will have little effect on the Eurozone economy in the long-term.

Christoph Weil, senior economist at Commerzbank, stated that “interest rates are already so low and policy is ultra-loose, so for now, monetary policy cannot impact investment or consumer demand. Thus, we do not think the ECB can influence the economy strongly at this time.”

Eurozone vaccine developments

Coronavirus Vaccine developments within the Eurozone have experienced some delays, with some countries not rolling out vaccines until January this year. Currently, only the Pfizer vaccine has been approved and available in the Eurozone, though it’s thought that the Moderna vaccine will become available later in January. Germany is the most ambitious country within the Eurozone, hoping to have 60% of the population vaccinated by the summer.

Whilst the slow rollout of coronavirus vaccines across the Eurozone may have hindered economic developments in the short-term, any continued progress is likely to strengthen the economic outlook as the prospect of herd immunity becomes a greater possibility.

British pound (GBP) struggles against euro (EUR)

Recent weeks had seen the British pound (GBP) edge higher against the euro (EUR) with vaccine progressions creating a more positive outlook for the UK economy. Today, however, has seen the British pound to euro (GBP/EUR) exchange rate dwindle around the EUR 1.12 mark.

The UK is still subject to a national lockdown which is casting a shadow over the future of thousands of businesses and economic recovery.

Thu Lan Nguyen, FX and EM Analyst at Commerzbank, stated how the outlook for the British pound (GBP) in the long-term has become more pessimistic as a result of Sterling’s uninspiring response to the Brexit trade deal as well as the economic scars left by the national lockdown.

“The market has apparently quickly come to the realisation that, even with an orderly Brexit, the economic outlook for the UK remains bleak.” Nguyen said. The “ambiguities of the trade relationship between the EU and the UK” also do help matters.

However, with the UK on track to vaccinating 15 million people by mid-February, it’s hoped that the UK will be on the path to normality.