Covid vaccine rollout fuels hopes of record eurozone growth in 2021


The eurozone economy will grow next year at its fastest rate since the single currency was launched more than two decades ago, according to a Financial Times poll of economists who said the biggest risk was if vaccines failed to stop the coronavirus pandemic.

As European countries start to vaccinate people against Covid-19, the 33 economists polled by the FT this month predicted that eurozone gross domestic product would rise by an average of 4.3 per cent next year, rebounding from this year’s record post-war recession.

This is more optimistic than the European Central Bank’s 3.9 per cent forecast published this month, but below the 5.2 per cent that the IMF predicted in October.

“Vaccines will re-establish normal conditions for most services,” said Daniel Gros, a director at the Centre for European Policy Studies. “There are no fundamental financial imbalances to hold back either demand or investment. Consumers will have liquidity to satisfy pent-up demand.”

However, most economists expect the pandemic to leave significant scars, with more than half predicting unemployment in the 19-country bloc will rise above 10 per cent for the first time in more than four years, up from 8.4 per cent in October.

Column chart of Eurozone GDP growth (%) showing Economists expect historic rebound

“While we forecast above-potential growth in the coming years, we expect second-round effects on the labour market and credit flows to weigh on the recovery for a significant period of time,” said Anatoli Annenkov, economist at Société Générale.

Two-thirds of economists polled think eurozone GDP will not recover to pre-pandemic levels until the middle of 2022 at the earliest, with a handful — including Mr Annenkov — saying this will happen only in 2023. Their forecasts for eurozone growth next year range from only 1.5 per cent to 6 per cent.

Lockdowns and travel restrictions to contain the virus’s spread are expected to drag the eurozone into a double-dip recession this winter. 

How did last year’s predictions fare?

Covid-19 has made a mockery of economists’ forecasts for 2020.

On average, economists predicted to the FT that eurozone growth would dip below 1 per cent this year — the slowest rate for seven years. That sounded bad at the time, but it was nowhere near as grim as the 7.3 per cent contraction the ECB now estimates.

Unsurprisingly, economists did not foresee the ECB launching fresh stimulus measures or Germany’s move away from its longstanding support for balanced budgets — both triggered by the economic impact of the pandemic.

Those surveyed did correctly predict that headline inflation would fall this year, but none imagined it could drop to the 0.2 per cent the ECB now expects.

However, most economists expect that by the second half of next year widespread vaccination and a boost from the €750bn EU recovery fund will prompt a “Roaring Twenties”-style rebound — similar to the one that followed the Spanish flu pandemic a century ago.

“We will see a surprise story of economic growth,” said Nick Bosanquet, professor of health policy at Imperial College London, predicting “a strong rise in consumption”.

While many economists think eurozone banks will suffer a rise in non-performing loans next year, most do not expect a repeat of the banking crisis that swept across the bloc after the 2008 financial crisis. 

Lucrezia Reichlin, economics professor at the London Business School, said the biggest risk for the economy was if the EU’s recovery fund “failed to deliver growth in fragile countries with consequences on public debt dynamics, in particular in Italy”.

Eurozone inflation has turned negative in recent months, but one-off factors are partly to blame and economists on average predicted headline price growth would rise to near 1 per cent next year, although still well below the ECB’s target of just under 2 per cent.

Video: Coronavirus in 2021: what we do and don’t know


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