RaboResearch - Economic Research

Eurozone outlook: Recovery depends on vaccine rollout


  • The Eurozone contracted by 6.8% in 2020. We forecast the Eurozone economy to grow by 4.0% in 2021, followed by 3.6% in 2022
  • This means we expect the economy to hit its pre-pandemic level mid-2022
  • Based on available information we forecast that the EU recovery fund will lift GDP by 0.5% over this and next year combined
  • Economic recovery is very dependent on the roll out of vaccines. The European strategy has not been very successful so far and tensions are rising
  • If it takes a quarter more to largely remove containment measures, i.e. taking it beyond the summer, the recovery to pre-COVID GDP levels could take almost one year longer

Slow start, but light at the end of the tunnel

The upsurge in infections since the fall has delayed the economic recovery. But performance in the final quarter of last year has showed that the economy has improved its ability to adapt to a reality of strict containment measures. Moreover, the second half of last year has demonstrated that the economy is resilient and activity can return rapidly once measures are lifted. This bodes well for the future. That said, while better able to adapt, the service sector is not immune to containment measures and activity will continue to be hampered for some time to come as new - more contagious-  mutations combined with a subdued vaccination campaign (we’ll return to this issue later) have forced governments to extend containment measures. At the same time, while industry surveys indicate that order positions continue to improve, the manufacturing sector - the economies’ driving force - might lose momentum. At least the limits of its support to overall economic activity seems to be in sight if supply chain bottlenecks are not dealt with soon.

Figure 1: Despite thriving manufacturing sector, composite PMI points to a contraction in Q1
Figure 1: Despite thriving manufacturing sector, composite PMI points to a contraction in Q1Note: Manufacturing PMI overstates the sector’s strength as supply chain issues push the figure up, rather than down.
Source: Macrobond, IHS Markit, RaboResearch
Figure 2: Containment measures have suppressed mobility early 2021
Figure 2: Containment measures have suppressed mobility early 2021Source: Macrobond, RaboResearch

As such, we have penciled in a small contraction for the first quarter. But from then onwards things should get better. In our base case scenario lockdowns can be somewhat loosened in the second quarter, once the third wave has been suppressed and vaccinations are well underway. Yet only from the third quarter will there be room for extensive relaxations. Consequently, we expect soft growth in Q2 followed by a significant recovery in the second half of the year. Thereafter, we believe the Eurozone economy will pursue its recovery path in a more gradual fashion.

Table 1: Eurozone growth outlook
Table 1: Eurozone growth outlookSource: Macrobond, RaboResearch

Extensive government support, which we expect to continue for as long as necessary to prevent a major demand shock, has basically frozen the economy, keeping businesses afloat and people in their jobs. Therefore, we only expect a modest rise in bankruptcies and the unemployment rate for now. Nonetheless, we do expect some businesses to throw in the towel as the crisis simply takes too long, while bankruptcies are likely to increase once the government winds down support – probably, and paradoxically, when the economy opens up and the recovery takes hold. In any case, weakened balance sheets are likely to keep a lid on spending for some time, once the easiest part of the recovery is behind us.

The rise in inflation this year is mostly of the cost-push type rather than being demand-led. Higher oil prices, a VAT hike in Germany (back to its pre-COVID level) and supply-chain issues are all contributing to higher inflation this year. Assuming that this is not being fully compensated by rising wages, this means that some of the pent-up demand or higher savings built up during the crisis so far could be sucked up by higher prices rather than higher volume-demand this year. On the other hand, the first pay-outs from the EU’s Recovery and Resilience Facility this year (and gaining pace next year) should be a positive contributor to economic growth.

Altogether, after the record GDP contraction of 6.8 percent in 2020, we forecast the economy to grow by 4% in 2021, followed by an expansion of 3.6% in 2022 (table 1), supported by the EU recovery facility. In our first attempt to calculate the impact of the EU recovery fund we come to a cumulative GDP impulse of 0.5% over this and next year (see box below). We project the economy to reach its pre-COVID level by mid-2022.

Box 1: The GDP impact of the EU Recovery fund

The economic recovery will be spurred by the EU recovery fund (NGEU). So far, the setup of the NGEU has already supported the Eurozone economy by suppressing government bond yields; even before actual money had started to flow. From this year onwards, funds are expected to actually start flowing, although their size and use will likely still be limited this year. It will mostly entail disbursements from the small REACT-EU (total size of EUR 47.5bn) and part of the pre-financing of Member States’ Recovery and Resilience plans – the Recovery and Resilience Facility has a grant component of EUR 312.5bn and a loan component of EUR 360bn. Remember that commitments within the Recovery and Resilience Facility will be based on investment plans to be presented to the European Commission before the end of April. But apart from pre-financing of at most 13% of those plans this year, further disbursements will depend on spending and reform milestones. Pay outs can run from 2021 to 2026.

Whereas REACT-EU will likely be used in particular to fund COVID support measures with EU grants rather than market financing, especially the grants component of the RRF has the potential to boost GDP via additional investment.

Although it is hard to put a figure on the precise impact of these extra funds as only France has come up with detailed plans so far, we have included a preliminary estimate in our baseline forecast. In order to do so, we have made assumptions on the absorption capacity of member states, possible pre-financing on their part if capacity is larger than the expected speed of disbursement from the fund, and the multiplier of the investments and required reforms. As for the multiplier of investments, we’ve set it at close to, but just below 1 (on average) in the early years. The positive impact of reforms will not materialize within our forecast horizon – running until end-2022 – as it usually takes time before they bear fruit. Finally, we assume that only the grant component will add to GDP growth, while the loan component at best will give a negligible benefit stemming from the (minor) negative interest rate differential that stems from the common issuance. All in all, according to our preliminary estimate, the impulse from the EU Recovery and Resilience Facility will be limited this year, but will gain importance thereafter, lifting the Eurozone GDP level by around 0.5% in 2022 compared to a scenario without the facility.

The vaccine race

Our base scenario described above is obviously very dependent on the vaccine rollout. The European Commission expects 70% of the adult population to be inoculated by the end of September, passing the WHO threshold of between 60% and 70% required for herd immunity – although that threshold is being questioned among epidemiologists. Some are thinking a vaccination rate of up to 85% might be necessary. In any case, the longer it takes before a substantial part of the population has been inoculated, the longer it takes before the economy will substantially open up, the later the recovery can take hold and the larger the potential scarring effects for businesses and workers.

Figure 3: Expected vaccine delivery
Figure 3: Expected vaccine deliverySource: Leaked slide from EC summit, RaboResearch
Figure 4: EU’s vaccine purchase per producer
Figure 4: EU’s vaccine purchase per producerNote: * EC is still in negotiation with these parties
Source: European Commission website, RaboResearch

While the Commission’s projections of vaccine deliveries show that its target is within reach, there are reasons to be cautious (figure 3 and 4). So far, the EUs vaccine strategy has not been an astounding success. It has been slower than its peers in approving vaccines, multiple vaccine deliveries have been delayed and the EU has had a public fallout with vaccine producer AstraZeneca. Consequently, the EU is trailing behind (figure 5 and 6). Member states are starting to worry that the joint purchase of vaccines might not have been the best choice after all and some countries have decided to take matters into their own hands. Germany for example has ordered 30 million doses on top of the doses promised by the EU. Meanwhile, Hungary is administering jabs which have not been approved by the EMA yet, whilst the Czech Republic, Slovak Republic and Poland are considering to do this as well. The best hope of the EC is that somehow, production can be scaled up in Europe to make good for the delayed deliveries. In the recent EU summit on February 25 von der Leyen suggested that the number of vaccines delivered could be at most five times higher in the second quarter than in the first quarter.

Figure 5: The EU trails behind in the vaccine race (situation as of 4 March)
Figure 5: The EU trails behind in the vaccine race (situation as of 4 March)Source: Macrobond, Our World In Data, RaboResearch
Figure 6: EU countries give much less jabs a day
Figure 6: EU countries give much less jabs a day  Source: Macrobond, WHO, RaboResearch

But next to the delivery of vaccines, administering vaccines also seems to be a bottleneck. First, because in some countries, citizens are always already quite wary of vaccines and the speed at which COVID-vaccines are developed has fuelled some concern. In France for example, a recent poll suggests that only 57% of the people intends to get vaccinated, compared to 89% of UK citizens. Additionally, some people don’t show up if they’re rostered to get the AstraZeneca vaccine, because of its poor (perceived) reputation [1]. Second, because some countries are held up by bureaucracy. Consequently, there are plenty of vaccines around for some countries (on top of the ones reserved for the second dose). According to the ECDC we are talking about almost 9.5 million doses in the Eurozone (4 March) in total, i.e. 2.75 doses per 100 people[2].

Against this backdrop, we have developed a risk scenario in which the vaccination campaign trails the speed necessary to substantially reduce the incidence rate, as a results of which strict containment measures need to stay in place for longer.

A risk scenario: What if normalization is delayed?

A less successful vaccination campaign than currently envisaged can both be the result of delayed deliveries, inabilities to administer delivered doses at sufficient speed and more contagious virus mutations requiring a higher vaccination rate to reach herd immunity. Our risk scenario does not envisage mutations that are entirely immune to current vaccines, which would imply that both vaccines need to be altered and previously inoculated people are no longer protected. Such a scenario would even be more negative.

In short, in our downside risk scenario we assume that current containment measures would stay in place during the second quarter, even running into the third quarter. Gradual loosening would only take place over the course of Q3, and a substantial opening of the economy would need to wait until the final quarter of the year. In essence this means that loosening of the reigns by one quarter is the result. The path is not necessarily linear, in the sense that the same result could be reached by ups and downs in the level of strictness of measures within a quarter – as we have also experienced since the fall.

When postponing the significant opening of the economy to the end of the year, we need to be aware of the fact that more goes lost than ‘just’ one quarter of activity in the services sector. It would mean that the summer holiday season, so badly needed especially in the Mediterranean countries, will again be wasted. For illustration, about half of annual tourism income in Spain is earned between June and September. Hence, while we expect governments to lengthen financial support to hard-hit sectors, we expect more businesses to drop out than in the baseline, because the (light at the) end of the tunnel is just too far away – and part of the support is in the form of cheap loans or delayed (tax) payments rather than direct support. This story holds in particular for countries with a large tourism sector such as Spain and Italy, rather than for example Germany, with a large industrial sector. Still also in Germany would we expect larger scarring effects for businesses and workers and, hence, a negative impact on investment and consumption.     

All in all, in our risk scenario euro area growth would fall from 4% to 2.5% in 2021 and from 3.6% to 2.9% in 2022 (figure 7). Recovery to the pre-crisis level would be pushed back by three quarters, from the end of 2022Q2 to the end of 2023Q1 (figure 8).

Figure 7: In our downside risk scenario, Eurozone annual GDP growth would be lower in this and next year, but higher in 2023
Figure 7: In our downside risk scenario, Eurozone annual GDP growth would be lower in this and next year, but higher in 2023Source: Macrobond, NiGEM, RaboResearch
Figure 8: In our downside risk scenario, Eurozone recovery to the pre-crisis GDP level would be delayed by three quarters
Figure 8: In our downside risk scenario, Eurozone recovery to the pre-crisis GDP level would be delayed by three quartersSource: Macrobond, NiGEM, RaboResearch

[1] Experts note that the AstraZeneca jab is unfairly seen as inferior.

[2] Data on administered doses tends to differ slightly between different sources.


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