- We now forecast the eurozone to grow 4.2% this year and 4.4% in 2022.
- We made small revisions factoring in a higher degree of business and consumer adaptation to COVID-19 restrictions, a gradual vaccination rollout, and strong external demand.
- Favorable financing conditions in the eurozone underpin our revised baseline forecast.
- Weaker economic fundamentals and the ECB's commitment to monetary accommodation are shielding long-term eurozone interest rates against the rise in U.S. yields.
The eurozone economy is less sensitive to social-distancing restrictions than a year ago. Lockdowns are now restricting economic activity by about 10% since fourth-quarter 2020, according to S&P Global Ratings' estimates. That's less than one-third of the impact in second-quarter 2020, and we see the correlation between growth and lockdown stringency diminishing over time (see chart 1). The eurozone economy shrank only 0.7% in fourth-quarter 2020 despite a second wave of COVID-19. That was a much milder than our expectations of a 2% contraction back in December. Reflecting the lessened sensitivity to lockdowns, we still expect the eurozone economy to recover its pre-crisis levels of activity by first-quarter 2022 and made small revisions to our forecast for eurozone GDP growth to 4.2% for 2020 and 4.4% for 2022 (see table 1 at the end of the article).
Across Europe, firms have adapted to COVID-19 health and safety measures, enabling industry and construction to continue their recovery in the fourth quarter, which also supported activity in professional services. Meanwhile, eateries have introduced takeout services and consumers are more likely to shop online when under lockdown than before the pandemic. This dynamic is still visible in the data at the start of this year. Even if pointing to weakening activity, the services PMI (Purchasing Managers' Index) has stayed relatively resilient in the face of renewed restrictions in the sector, while the recovery in manufacturing has been gaining pace (see chart 2).
A faster economic recovery in the Asia-Pacific and U.S. as well as the need for restocking will continue to drive the recovery in eurozone industry this year. By the end of last year, European exports to China had risen above their pre-pandemic levels (see chart 3). Now, we also expect the region's exports to the U.S. to pick up on the back of the large fiscal stimulus under way there. That adds to the eurozone industry's production expectations, which were already at a two-year high in February (see chart 4). The industry has amassed a backlog of orders after last year's supply chain disruptions and factory closures, creating an impetus to catch up. This has been most visible among German manufacturers, whose order books and production expectations are much higher than a year ago, while its large European peers are taking more time to see their order books recover.
Aside from strong external demand, the domestic backdrop should also improve this summer. We assume an end to many restrictions to economic activity as the number of vaccinated increases. This should trigger a quick rebound in consumption and services activity as consumers can leave their homes again and spend some of their accumulated savings, similar to what we saw in third-quarter 2020. This should also enable a quick recovery in the labor market and household incomes, as short-time workers return full time and firms start reemploying laid-off temporary workers (see "This Time, Europe Is Set To Stage A Jobs- Rich Recovery," published on March 16, 2021). Nonetheless, while we expect the 2021 summer season to benefit from a large vaccination rollout, we still assume some restrictions to remain in place, such as test requirements and potential quarantine measures limiting international travel. This means that countries like Spain, Italy, and France are likely to have to wait another year before their tourism industries fully recover. And therefore, their economies will take more time to return to precrisis levels than the industrial hubs of Europe, such as Germany and the Netherlands.
Besides the race between the vaccine and the virus, another essential condition for our baseline scenario are continued favorable financing conditions in the eurozone. So far, European markets have been largely unmoved by the sudden rise in long-term U.S. yields. German 10-year yields ticked up only 30 basis points (bps) since the start of the year. They remain negative in nominal and real terms and 200 bps below U.S. Treasury yields. Financing conditions in the eurozone are historically loose across all asset classes, with ultralow government bond yields being the main driver, and with the sharp upward revision of the U.S. growth outlook having put a damper on the appreciation of the euro exchange rate (see chart 5).
Fundamental factors suggest that the decoupling of long-term yields on both sides of the Atlantic may linger. Consensus forecasts for U.S. GDP growth in 2021 have been revised upward due to the recent announcement of a new large fiscal stimulus package. In Europe, the fiscal expansion this year will not be as sizable as in the U.S. And, it will not increase compared with the level last year. The European Commission estimates a 3.7% of GDP widening of the structural budget balance excluding interest and one-offs for 2020. What's more, its source will change: According to European Commission data, EU Next Gen grants, taken together with other EU funds, would add 1.8% of GDP in 2021 and 1.5% in 2022 to eurozone countries' fiscal stimulus (and for the EU-27, 2.0% and 1.7%, respectively). However, we see a non-negligible risk that a substantial share of grant payouts originally scheduled for 2021 will take place in 2022. At the same time, the monetary expansion set for 2021 in the eurozone is to remain as bold as last year. As a result, the combination of stronger fiscal stimulus in the U.S. and ongoing monetary stimulus in the eurozone should not disrupt the gap in euro versus U.S. dollar interest rates in real terms. Second, inflation is not returning to the eurozone as quickly as many observers hope. Inflation spiked at the start of the year to an annual 0.9% from -0.3% on one-off factors (such as the normalization of German VAT rate, shift in the seasonal pattern of sales, changes in the consumer price basket) and the rise in oil prices. Energy prices will drive inflation close to the ECB target of 2% by the summer, but we expect the momentum to abate through the end of 2021, before a slide back to 1.2% in 2022, as pressure on wages will remain low and oil prices are assumed to stabilize.
Market fundamentals for eurozone's government bonds also speak for stable European yields. The ECB reinforced its commitment to keeping financing conditions favorable by increasing the pace of bond purchases from April in the context of U.S. yields rising, after the pace of quantitative easing (QE) slowed to €19 billion a week in the past three months, from €23 billion the three months before. The remaining envelope of the ECB's PEPP program until completion in March 2022 (€1.04 trillion) is enough to cover almost the full amount of gross long-term commercial borrowing of eurozone governments that S&P Global Ratings expects in 2021 of €1.26 trillion (see "Sovereign Debt 2021: Developed EMEA’s Commercial Borrowing Could Reach $1.4 Trillion," published on March 1, 2021). Under its two QE programs, the ECB is now holding 29% of eligible eurozone government bonds. Their continuation with the same composition of purchases (a cumulative 88% of government bonds) suggests a further increase in that share, whose scope will also depend on the amount of supranational bonds the ECB might purchase, as the EU is likely to step up issuance this year. The composition of purchases in national government bonds might change too, considering that ECB holdings vary sharply, ranging from a 24% holding in Belgium bonds to a 44% holding in Dutch bonds (see charts 7 and 8).
While the weaker fundamentals for the eurozone economy compared with those in the U.S. as well as the interplay of demand and supply factors on eurozone government bond market are supposed to shield long-term eurozone yields further from the rise in U.S. yields, it does not mean that European financing conditions will remain automatically favorable across all asset classes. Institutional investors might be willing to switch to U.S.-dollar from euro-denominated assets if yields move higher. For now, the pickup in yields between the two currencies just returned to its pre-COVID-19 gap (200 bps). A lasting gap would probably require the ECB to be very active in keeping financing conditions loose this year (see chart 9).
|S&P Global Ratings European Economics Forecasts, March 2021|
|10-Year government bond|
|USD per euro||USD per GBP||Euro per GBP||CHF per USD||CHF per euro|
|Eurozone (ECB)||U.K. (BoE)||Switzerland (SNB)|
|Deposit rate||Refi rate|
This report does not constitute a rating action.
|EMEA Chief Economist:||Sylvain Broyer, Frankfurt + 49 693 399 9156;|
|Senior Economist:||Marion Amiot, London + 44(0)2071760128;|
|Economist:||Sarah Limbach, Paris + 33 14 420 6708;|
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: firstname.lastname@example.org.