The feeble economic data show the importance of accelerating inoculations and getting the bloc’s 800 billion-euro ($968 billion) joint recovery fund under way as soon as possible.
Euro-area output shrank 0.6% in the three months through March, after a decline of 0.7% at the end of 2020. Germany, Italy and Spain all contracted, while French growth was clouded by the fact that the government was forced to reimpose virus restrictions this month.
In contrast, the U.S. economy has expanded for three straight quarters and accelerated at the start of this year. Vaccinations, job growth and two rounds of federal stimulus payments combined to supercharge household spending, which climbed at the second-fastest pace since the 1960s.
The euro zone should soon start its own rebound — European Central Bank Chief Economist Philip Lane said on Thursday that the bloc is at an “inflection point” — but the economy won’t reach its pre-pandemic size until mid-2022, a full year behind the U.S.
“If you add together the divergence in terms of the pandemic, vaccinations and fiscal support, the euro area is still a bit stuck while others are clearly exiting the crisis,” said Philippe Ledent, an economist at ING Groep (AS:INGA) NV. “I don’t want to be particularly negative for the euro area — there will be a recovery — but it’s important that the euro zone isn’t always behind.”
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“Vaccination programs are picking up speed and as older age groups get inoculated, we expect the pressure on health services to ease, allowing governments to start gradually lifting restrictions later this quarter. The euro-area economy operated roughly 5.5% below its pre-pandemic level in 1Q.”
-Maeva Cousin and David Powell.
Germany’s economy, the region’s largest, highlights the woes that are afflicting the euro zone. Not only is the country in the midst of a strict lockdown, but the so-far resilient manufacturing sector is being hit by worsening supply bottlenecks. GDP shrank 1.7%, worse than economists forecast.
France, the second-biggest economy, performed better than expected but has now been forced into imposing a monthlong lockdown. That includes closing schools, nurseries, and non-essential stores, and restricting travel between regions.
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Signs of a nascent upturn were evident in some of Friday’s data. Euro-area unemployment fell in March, and Spanish retail sales surged. Sales also jumped in Switzerland.
The region is making progress on its recovery fund, with governments submitting spending plans this week for approval by the European Commission. Still, the fund-raising needs to be ratified by all 27 member states, and disbursements won’t start until the summer.
That’s raising concern in some quarters that the region is moving too slow in rebuilding. French Finance Minister Bruno Le Maire said this week that the EU has “lost too much time” compared to the U.S. and China.
Other data showed price pressures — one indicator of demand — are mixed. April inflation came in at 1.6%, the highest rate in two years, but a measure excluding volatile items such as food and energy fell to 0.8%.
The ECB has insisted that economic uncertainty, particularly over jobs, will keep underlying inflation subdued for a while. It has ramped up the pace of its bond-buying program to shield the region from higher global borrowing costs that are spilling over from the faster U.S. recovery.
”We continue to be optimistic,” said Tuuli Koivu and Anders Svendsen, analysts at Nordea. “It is still possible to reach our forecast from January, foreseeing 4.5% growth in 2021 and 4% in 2022. Obviously, not much can go wrong in order to hit those numbers.”
Source: Economy - investing.com
