Europe Insights - September 2021

Europe Insights - Macro, equity and fixed income monthly

• Europe’s recovery surprised to the upside in the second quarter of this year, as June wrapped up the gradual re-opening of pandemic-hit sectors. This triggered demand for services, with household consumption rebounding by four per cent compared to the previous quarter. Confidence surveys showed exceptionally elevated levels of business activity in July, significantly higher than the levels seen last year when the economy re-opened after the first infection wave.
• Although surveys still pointed to very strong activity in August, they also signalled that the re-opening bounce may have peaked. Eurozone growth will likely be the highest this year in the third quarter, and the consensus of economists anticipates a full recovery in the same period.
• In the period prior to the pandemic (2012-2019), eurozone trend growth (1.2 per cent) stood below the advanced economies’ average (1.9 per cent). Structural headwinds, notably the region’s institutional framework, may be a major factor behind a low growth environment, despite some improvement over the past decade. Compared to after the Great Financial Crisis, the post-pandemic rebound has been swifter so far, with much more resilient capital expenditures and similar public spending (see Figure 1).
• Beyond the re-opening bounce, it remains to be seen whether the recent steps on the fronts of the monetary, fiscal and climate policies will improve economic performance compared to the previous decade. In the short-to-near term, uncertainties have increased over the determination of governments to cooperate and implement a policy mix involving fiscal accommodation, favourable financing conditions, and necessarily higher taxes.