RaboResearch - Economic Research

Eurozone economy resumes recovery in second quarter of 2021

Economic Report

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  • The reopening of euro area economies since end Q1/early Q2 has spurred economic activity
  • GDP grew with 2% q/q in the second quarter of 2021, after two quarters of contraction
  • Spain and Italy outperformed the Eurozone average, with 2.8% and 2.7% q/q, respectively
  • Germany and France posed growth rates of 1.5% and 0.9% q/q, respectively
  • Going forward, the recovery should be sustained in the coming quarters, although supply chain disruptions will continue to put a lid on manufacturing production
  • The main risk to the short-term outlook stems from the highly contagious Delta variant, especially for tourism dependent economies, but so far the overall macro-impact of the Delta variant seems to be limited still in most countries

GDP grew with 2% q/q in Q2

As expected, the reopening of euro area economies since end Q1/early Q2 has spurred economic activity in the services sector. According to the release of the flash GDP figure by Eurostat this morning, GDP grew with 2% q/q, after two quarters of contraction (figure 1), slightly outperforming our 1.7% q/q forecast. The breakdown into expenditure components for the Eurozone has not yet been published, but data for individual Member States shows that the drivers behind Q2 growth were domestic. Household consumption accelerated everywhere, while foreign trade acted as a drag in most countries because imports rose faster than exports. The picture for investment is more mixed, posting a contraction in for example Spain, but with growth accelerating somewhat in France.

From a sectoral point of view, the services sector was by far the main driver of growth, owing to the reopening of economies. The manufacturing sector also contributed positively, but as we had expected production was rather muted when compared to the promising order books and PMI figures. Largescale supply chain disruptions are to blame for this.

Figure 1: Eurozone economy resumes its recovery in 2021Q2
Figure 1: Eurozone economy resumes its recovery in 2021Q2Source: Macrobond, RaboResearch
Figure 2: Manufacturing PMIs still take the lead, but services sector is catching-up fast
Figure 2: Manufacturing PMIs still take the lead, but services sector is catching-up fastSource: Macrobond, RaboResearch

All large Member States pose growth

When looking at the individual Member States that have also published a flash estimate today, all have benefitted from the reopening of their economies. Yet quarter-on-quarter figures show quite some dispersion. This is at least partly the result of different reopening speeds, as well as varying amounts of lost GDP that still need to be recovered to return to pre-pandemic levels. Clearly, the more catching-up to do, the easier it is to post high growth rates when more activity is allowed again and life returns back to normal.

This certainly holds for Spain, which posted the highest growth rate among the large Member States (2.8% q/q, figure 1). Activity has been increasing since the end of Q1, on the back of substantial loosening of containment measures. Going forward, the recovery will continue, but Spain is among the countries most at risk of enduring economic setbacks because of the Delta variant – both given the large outbreak and the importance of tourism.

The Italian economy grew 2.7% q/q, joining Spain in the list of outperformers. Economic activity took flight over the course of the second quarter, in line with the reopening of the economy. Both domestic demand and net foreign trade made positive contributions. This high growth rate should be seen in the context of the setback endured end-2020, when the economy contracted with 1.8% q/q. In the first quarter of 2021 growth stalled, implying the catch-up was postponed until the second quarter. Nevertheless, the Q2 figure outperformed consensus. Going forward, the Delta variant still seems to be less of an issue than in many of Italy’s peers, meaning the country might even be able to lure tourists away from its Southern peers Spain and Portugal, but Covid clearly does pose a risk for Italy as well.

In Germany, economic output increased by 1.5% q/q in the second quarter, falling half a percentage point short of the consensus expectation of 2%. Making matters a bit worse, the estimate for first quarter GDP was revised down to -2.1% q/q from -1.8% q/q. While it was generally expected that the spring rebound would more or less make up for this winter’s setback, the aggregate negative surprise was actually 0.8 percentage point. The continued progress on vaccinations reduces the effects of the public health crisis on the economy and supply bottlenecks should eventually widen again. In our view, the pace of the recovery is likely to have accelerated to around 2.5% q/q this summer, and activity could reach its pre-pandemic level again late this year.

French GDP came in slightly better than expected, with 0.9% q/q versus a 0.8% consensus – as well as a slight upward revision to the first quarter reading, to show zero growth instead of a -0.1% decline. The drivers behind Q2 growth were domestic, with both household consumption –linked to the gradual lifting of restrictions and a boost to consumer spending in e.g. bars and restaurants– and gross fixed capital formation growth accelerating. Gross fixed capital formation even already slightly surpassed its 2019Q4 levels. Foreign trade was still a drag on growth, but the effect lessened.     

Recovery will continue, despite Delta variant

Going forward, the recovery in the services sector should be sustained in the coming quarters, on the back of rising vaccination rates and the accompanying gradual return to normal (58% of the EU population has had at least one shot and 48% is fully vaccinated). In addition, uninterrupted strong order books in the manufacturing sector, improving global trade and the Next Generation EU support the outlook. Furthermore, the ECB Bank Lending Survey suggests that demand for business loans in the Euro area is starting to be more driven by investment intentions again, rather than building liquidity buffers, after this was disrupted by the pandemic.

That said, supply chain disruptions continue to put a lid on industrial production, cost-push inflation is expected to temper consumption growth somewhat and the potential for pent-up demand in the services sector has its limits (also see Eurozone pent-up demand: big and decisive or over-estimated and uncertain?).

The main risk to the short-term outlook stems from the highly contagious Delta variant which has been slowing the phasing out of lockdown measures and has already even caused governments to rollback relaxations and tighten international travel restrictions. It mainly threatens the recovery of the tourism sector in several Member States, like Spain and Portugal, and could delay the recovery of especially investment spending due to increased uncertainty. Indeed, it shows again that it ain’t over till it’s over. In other words, until herd immunity is reached, not only within the EU, but globally, new variants can throw a spanner in the works and set us back for a (short) while.

Yet, so far the overall macro-impact of the Delta variant seems to be limited still in most countries. Google mobility data shows that while the upward trend in movements to retail and recreation venues –a proxy for economic activity– has stopped or reversed somewhat, it has remained above or close to pre-pandemic levels in most Member States – with activity in Spain falling short the most when compared to pre-pandemic (figure 3).

And while consumer sentiment decreased a minor touch in July, overall economic sentiment continued to trend upwards in July according to the ESI survey of the European Commission (figure 4). Finally, anecdotal evidence suggests people really want to travel this summer, after a year with so many restrictions, and are simply willing to neglect negative travel advises and cope with additional arrangements that need to be made, such as testing and filing documents before traveling. Nevertheless, we will continue to monitor developments closely as not much data on the economic impact of the Delta variant is available yet and governments have only started to tighten restrictions over the course of July or even with a starting date of early August. 

Figure 3: So far, only minor setback in movements to retail and recreation venues
Figure 3: So far, only minor setback in movements to retail and recreation venuesSource: Macrobond, RaboResearch
Figure 4: Sentiment continued upward trend in July, despite rise of Delta variant
Figure 4: Sentiment continued upward trend in July, despite rise of Delta variantSource: Macrobond, RaboResearch
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