Euro zone economy to gain momentum in 2021 on Covid-19 vaccine hopes: Reuters poll

The euro zone economy will contract again this quarter as renewed lockdown measures stifle activity, according to a Reuters poll which showed the bloc’s GDP would then return to pre-crisis levels within two years.

Hopes for a coronavirus vaccine and additional support from the European Central Bank this month meant quarterly growth forecasts for next year were upgraded in the poll conducted from Nov. 26-Dec. 2, reports Reuters.

“We now assume vaccines will be rolled out in the euro zone next year and most restrictions on economic activity are lifted during Q2. As a result, GDP increases by around 5.0 per cent next year, regaining its pre-COVID level in early 2022,” said Andrew Kenningham, chief Europe economist at Capital Economics.

“There are still big risks to this forecast. There could yet be a third wave of the virus, vaccine distribution could run into political or logistical problems, and governments could be slower to ease restrictions. On the other hand, the vaccines could be more effective or easier to roll out than anticipated”.

Nearly 80 per cent of respondents or 36 of 45, who replied to an extra question said the economy would return to pre-crisis levels within two years.

That was a major turnaround in expectations from August when more than 70 per cent of economists said it would take two or more years to reach that level.

The wider poll showed after contracting 2.6 per cent this quarter, the economy would grow 1.1 per cent in the first quarter of 2021 compared with 0.8 per cent in the last poll.

It was then predicted to expand 2.0 per cent and 1.8 per cent in Q2 and Q3, better than median predictions of 1.8 per cent, 1.2 per cent in November.

On an annual basis, the economy was expected to shrink 7.4 per cent this year, and grow 5.0 per cent in 2021 largely unchanged from the last poll. For 2022, the growth forecast was upgraded to 3.5 per cent from 3.1 per cent.

That pick-up in growth will not filter through to inflation which was expected to remain far below the European Central Bank’s target of just below 2 per cent, averaging 0.3 per cent in 2020. 0.9 per cent in 2021 and 1.3 per cent in 2022.

Having remained in negative territory for the fourth straight month in November, inflation is likely to be a point of focus when the ECB’s Governing Council meets next week.

The ECB has launched a strategic review after years of inflation undershooting its target and nearly 80 per cent of respondents to an extra question, or 33 of 43 economists, said the ECB would change its inflation target.

While a smaller section of poll participants commented on what the target would be, most said the ECB would allow more leeway around 2.0 per cent or adopt an average inflation targeting framework, similar to the Federal Reserve’s recent policy.

“We are probably going to see something which looks a little bit similar to the Fed in the sense that this will be more of a symmetrical target. By changing to a symmetrical target, you build in a little more tolerance for higher inflation in the future,” said Elwin de Groot, head of macro strategy at Rabobank.

“This cements the idea rates will stay very low in the coming years... but the past ten years suggest these very relaxed policy settings are not sufficient to really create more growth and inflation. What you really need is a combination of monetary and fiscal policy.”

The ECB was expected to top up its pandemic-related bond purchases by 500 billion euros, at its Dec. 10 meeting, extending the programme by six months until December 2021, a Nov. 18 poll found. It was also predicted to change the terms of its targeted long-term loans to financial institutions.