Euro Zone’s Crunch Quarter for Crisis Recovery Is Starting

Europe’s stuttering efforts to overcome the coronavirus crisis may finally be about to reach a turning point.

After a troubled start to its vaccination drive, progress on ramping up inoculations in the second quarter will determine whether the euro area can finally shake off the worst economic turmoil in living memory or languish further behind its peers.

Three months of tentative immunizations recently forced more optimistic forecasters from JPMorgan Chase & Co. to UBS Group AG to cut growth outlooks for 2021. At the same time, the prospect of real progress during the current quarter is making comparatively cautious projections for the region now seem achievable.

Euro Zone’s Crunch Quarter for Crisis Recovery Is Starting

That still won’t be easy. Success will require authorities to administer millions of jabs every week while battling resurgent outbreaks that have triggered renewed lockdowns. France is poised to enter a renewed phase of restrictions.

“The base case is that, if vaccinations progress and the weather gets better, things will improve,” said Dirk Schumacher an economist at Natixis in Frankfurt. “Given the level of pent-up demand, this should ignite solid growth rates. If infection dynamics keep rising and there’s a complete shutdown, of course this is not going to happen.”

A second-quarter turnaround would already mean a costly delay inflicted by the European Union’s flawed procurement of vaccines, patchy delivery and a sluggish rollout. Barely 10% of EU residents have received at least one dose, little more than a third of the U.S. tally.

This is “short of what we had expected,” European Central Bank President Christine Lagarde told Bloomberg Television on Wednesday.

Euro Zone’s Crunch Quarter for Crisis Recovery Is Starting

Those failures meant more extensive lockdowns, hurting growth. More optimistic forecasters have downgraded outlooks for 2021, including JPMorgan Chase, which now sees 5.3% growth instead of 5.8%, and Deutsche Bank, whose prediction fell to 4.6% from 5.6%.

Recent Euro-Zone Forecasts2021 GrowthChange
JPMorgan Chase5.3%Downgrade
Deutsche Bank4.6%Downgrade
Bloomberg Economics4.4%Upgrade
BofA Global Research3.3%Upgrade

Economists have reassessed their view of the second quarter too. This week, Germany’s Ifo institute, Italy’s Istat and Switzerland’s KOF halved their prediction for expansion to 1.5% from 3% foreseen in December.

“The further extension of lockdown measures will leave an imprint on activity in the second quarter, although the vaccination campaigns are expected to gain traction in the coming weeks,” ECB chief economist Philip Lane said in blog post on Thursday.

France’s latest restrictions shouldn’t have a significant impact on the country’s growth forecast if they are lifted in early May, Bank of France Governor Francois Villeroy de Galhau said. The institution will publish its conclusions on April 13.

Building momentum behind Europe’s immunization push has cemented confidence in an eventual pickup. Bloomberg Economics even raised its growth outlook for the year to 4.4%.

“By the end of May, those who really need a shot should have had one, and the euro-area economy is likely to be reopening,” economists Jamie Rush, Maeva Cousin and David Powell said in a report. “We therefore expect activity to rebound swiftly.”

That view chimes with that of the ECB, whose central scenario is for expansion of 1.7% in the second quarter, setting the foundations for a recovery. Policy makers predict a 4% expansion for the year as a whole, driven by a sudden scale-up in vaccinations.

“I would certainly hope that the economy is going to pick up, that there will be a turnaround in the months to come,” Lagarde said.

A vaccination breakthrough is no longer a remote prospect. More than 200 million doses should belatedly reach the EU this month and next, and France just marked a milestone of 1 million jabs within three days.

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Hope of progress can be seen in improving confidence, with the European Commission’s measure of economic sentiment reaching levels last recorded before the pandemic.

Such optimism would see the scale-up of vaccinations facilitate lockdown loosening, permitting some outdoor reopening of consumer-facing businesses as warmer weather arrives, creating conditions for a hoard of extra savings estimated by Barclays Plc at 600 billion euros ($706 billion) to be spent, stimulating growth.

The second quarter could yet fizzle. Delivery delays and vaccine skepticism could disrupt efforts, and unprecedented quick mass immunizations might yet prove too ambitious. Some outbreaks are even worsening.

“If there’s a new mutation that’s immune against our vaccines, and lockdowns are in place throughout the year, that would be a real game changer,” said Daniel Hartmann, chief economist at Bantleon Bank AG in Zug, Switzerland.

Doubts also surround the EU’s 750 billion-euro recovery fund designed to support the pickup. Spending plans are still being submitted for disbursements to start from the middle of the year. Germany’s top court has also put the law authorizing the nation’s participation on hold to consider a legal challenge.

Villeroy said on Wednesday that European nations need to “walk our talk” by urgently implementing the plan.

Policy makers know another recovery delay would mean yet more lost output, with economic scarring. But for now, they take comfort knowing the crisis can’t last forever.

“Multiple vaccines brought the long-awaited light at the end of the tunnel,” ECB Executive Board member Isabel Schnabel said last week. “The sources of uncertainty then shifted from whether the crisis can be contained, to when we can expect a return to normality.”

©2021 Bloomberg L.P.

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