Effects on labour market and credit flows will continue to hinder recovery
The euro zone economy will grow next year at its fastest rate since the single currency was launched more than two decades ago, according to a Financial Times poll of economists, who said the biggest risk was if vaccines failed to stop the coronavirus pandemic.
As European countries start to vaccinate people against Covid-19, 33 economists polled by the Financial Times this month predicted that euro zone gross domestic product would rise by an average of 4.3 per cent next year, rebounding from this year’s record postwar recession.
That is more optimistic than the European Central Bank’s 3.9 per cent forecast published this month, but below the 5.2 per cent the IMF predicted in October.
“Vaccines will re-establish normal conditions for most services,” said Daniel Gros, a director at the Centre for European Policy Studies. “There are no fundamental financial imbalances to hold back either demand or investment. Consumers will have liquidity to satisfy 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 per cent for the first time in more than four years, up from 8.4 per cent in October.
“While we forecast above-potential growth in the coming years, we expect second-round effects on the labour market and credit flows to weigh on the recovery for a significant period of time,” said Anatoli Annenkov, economist at Société Générale.
Two-thirds of economists polled think eurozone GDP will not recover to pre-pandemic levels until the middle of 2022 at the earliest, with a handful – including Mr Annenkov – saying this will happen only in 2023.
Their forecasts for eurozone growth next year range from only 1.5 per cent to 6 per cent.
Lockdowns and travel restrictions to contain the spread of Covid-19 are expected to drag the euro zone into a double-dip recession this winter.
On average, economists predicted that euro zone growth would dip below 1 per cent this year – the slowest rate for seven years. That sounded bad at the time, but it was nowhere near as grim as the 7.3 per cent contraction the ECB now estimates.
Unsurprisingly, economists did not foresee the ECB launching fresh stimulus measures or Germany’s move away from its longstanding support for balanced budgets – both triggered by the economic impact of the pandemic.
Those surveyed did correctly predict that headline inflation would fall this year, but none imagined it could drop to the 0.2 per cent the ECB now expects.
However, most economists said that by the second half of next year, widespread vaccination and a boost from the €750 billion EU recovery fund will prompt a “Roaring Twenties”-style rebound – 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 strong rise in consumption”.
While many economists think euro zone banks will suffer a rise in non-performing loans next year, most do not expect a repeat of the banking crisis that swept across the bloc after the 2008 financial crisis.
Lucrezia Reichlin, economics professor at the London Business School, said the biggest risk for the economy was if the EU’s recovery fund “failed to deliver growth in fragile countries with consequences on public debt dynamics, in particular in Italy”.
Euro zone inflation has turned negative in recent months, but one-off factors are partly to blame and economists on average predicted headline price growth would rise to near 1 per cent next year, still well below the ECB’s target of just under 2 per cent.