Eurozone upswing: delayed – but li kely to be solid

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● Dark winter: The more contagious mutations of the SARS-CoV-2 virus are weighing heavily on the Eurozone economy this winter. Some countries such as Ireland, Portugal and Spain have already been affected severely. But even countries such as Germany, where the mutations have not yet spread widely, are delaying the easing of their lockdowns or are tightening some restrictions despite stable or falling numbers of recorded infections. They want to contain the risk that the mutations could cause a deadly UK- or Spain-style spike in infections.

● A lost quarter: So far, we had based our economic forecasts on the assumption that many countries could ease their restrictions somewhat in February and more meaningfully from March onwards. We now assume that restrictions will be maintained through February followed by a modest relaxation in a few countries in late March and a more general if stepwise easing from April onwards, as better weather slows the spread of the virus and as mass vaccination progresses. We cut our forecast for Eurozone GDP in Q1 2021 from -0.5% qoq to -2.0% qoq.

● Autumn – less grey than expected: But the news is not all bad. Amid the second wave of the pandemic, the Eurozone economy held up better in late 2020 than projected. GDP contracted merely by 1.3% qoq in Q4 2020 in France (versus a 13.7% qoq drop in Q2 2020), despite restrictions that were especially tight in November. The economy unexpectedly expanded by 0.1% qoq in Germany and 0.4% qoq in Spain. The Eurozone may have gotten away with a 0.9% qoq contraction in Q4 rather than the 2.5% drop that we had pencilled in so far. Stronger exports and some recovery in investment mitigated the decline in private consumption. Eurostat will publish its flash estimate on 2 February. Our upward revision to Q4 largely offsets the downward revision for early 2021.

● Rapid rebound ¡V once it can start: Due to the risk posed by virus mutations and the slow vaccination progress in the Eurozone, it remains difficult to predict when exactly restrictions can be eased and the economic rebound can start. However, recent data and events strengthen our conviction that, once the rebound begins, it will be robust.

● Reasons for optimism: (1) The Eurozone economy demonstrated its resilience by holding up in Q4. Households and companies and governments are coping much better with the situation than they did during the first wave. (2) In Q3 2020, the Eurozone had surprised even us optimists by recovering almost the entire Q2 2020 loss in one go. This illustrates the potential for a rapid snapback. (3) Households seem to be eager to go back to a more normal life. Pent-up demand for currently restricted consumer services – who would not like to go back to the pub, the theatre or the beaches? – will meet the excess savings that households have built up last year, worth an estimated 6.5% of 2019 annual household consumption. (4) A major part of the fiscal stimulus put in the pipeline last year – the extra spending on public investment and many public services – will only be disbursed in 2021 and 2022. (5) The backdrop for global manufacturing and trade, and thus for exports, remains favourable. In response to a bigger US fiscal stimulus, we have just raised our US growth forecast for 2021 from 5.3% to 6.5%.

● A different profile: The changes to the quarterly profile of our GDP projections with a stronger Q4 2020, but a delayed rebound in 2021, take our annual GDP calls from -7.3% to -6.9 for 2020, from 4.6% to 4.1% for 2021 and from 3.9% to 4.4% for 2022. As before, we expect the Eurozone to return to its pre-pandemic real GDP by Q2 2022

Holger Schmieding

Chief Economist

+44 20 3207 7889

holger.schmieding@berenberg.com

Florian Hense

Senior European Economist

+4420 3207 7859

florian.hense@berenberg.com

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