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Our eurozone growth forecast for 2021 has remained relatively
steady and consistently below market consensus and official
institutions' forecasts.
The latter are shifting downwards, however, as the harsh
reality of widespread COVID-19-driven containment measures
dawns.
National and sectoral variations in those restrictions, and
their subsequent easing, means the recent "noise" in economic data
will persist.
We continue to expect a consumer-led growth spurt from Q2
onwards.
IHS Markit recently updated its growth forecasts. Our forecast
for 2021 annual growth in the eurozone was edged up, to 3.8%,
reflecting the smaller than initially expected q/q decline in GDP
in Q4 2020 (revised to -0.6%) but also a slight offset from the
minor downward adjustment to our q/q estimate for Q1 2021 (to
-1.0%).
Downward adjustment to external forecasts
Chart 1 highlights a striking divergence of forecasters'
eurozone growth expectations for 2021. While IHS Markit's forecast
has remained relatively steady, and sub-4%, market consensus
expectations and those of official institutions (in this case the
European Commission) were way too optimistic initially but have
fallen back markedly since. Back in mid-2020, the consensus and the
Commission's 2021 forecasts were both in excess of 6%.
IHS Markit's current forecast of 3.8% remains below the current
market consensus expectation (of 4.4%, based on February's
Consensus Economics). Following the European Commission's latest
downgrade in February's "winter" update, its forecast now matches
IHS Markit's estimate.
Beware of annual growth rates
In such volatile times, annual estimates are a sub-optimal guide
to growth trajectories. As in 2020, the quarterly path of GDP
changes this year will be exceptionally bumpy due primarily to the
effects of COVID-19 containment measures and their subsequent
reversal.
Q1's GDP figures, which will be available from late April, will
confirm a second post-COVID-19 recession in the eurozone, albeit
much less severe than the first. But from Q2 onwards, we continue
to expect a compensating growth spurt, as COVID-19 restrictions
ease due to vaccination roll-outs and seasonal influences.
As in Q3 2020, we expect private consumption to lead the
pick-up, rebounding strongly following significant COVID-19
disruption in the prior two quarters, with household savings rates
declining following unprecedented increases in the first half of
2020.
How soon for the rebound?
While annual growth estimates for 2021 are now the same, IHS
Markit's quarterly path for eurozone GDP growth is different in one
notable respect from the European Commission's latest estimates. We
expect the rebound to begin in Q2 and to continue during Q3,
whereas the Commission expects the rebound to be concentrated in
the latter quarter only, reflecting different assumptions about the
speed of the unwind of COVID-19 restrictions.
Thereafter, eurozone q/q growth rates in both forecasts are
expected to moderate to a much more gradual pace of around 0.5%
q/q, through into 2022. As base effects will be very favourable for
y/y rates of change in eurozone GDP from Q2 this year onwards, we
think it more likely than not that the annual growth rate in 2022
will actually exceed that in 2021 despite the much lower trajectory
of growth rates. This is another example of why annual rates of
change should be treated with caution.
Divergence of GDP "crossovers"
We expect the "crossover" in eurozone GDP (that is, the quarter
in which it will surpass its pre-COVID-19 level) in Q3 2022, much
later than 2021's forecast "crossovers" in the US and Canada, in
part due to the next slug of large-scale US fiscal stimulus.
GDP "crossovers" will also vary considerably across the
eurozone's member states, in line with divergent growth forecasts,
including for 2021. These variations in performance reflecting a
range of factors, including the relative magnitude of 2020's GDP
declines, recent divergence of COVID-19 trends, related
restrictions and approaches to containment, differences in exposure
to the most and least affected sectors of activity, plus variations
in vaccination roll-outs and policy support.
Long story short, the more manufacturing-driven, less indebted
"northern" economies will experience their GDP "crossovers" much
earlier (think Germany) than the consumer services-sensitive, more
indebted "southern" economies (think Greece).
But again, this may not necessarily be reflected in annual
growth forecasts for 2021, as Chart 3 illustrates. Those that
suffered comparatively smaller declines in 2020, like Germany, will
have less scope to rebound this year.
Look through data volatility
"Noise" in economic indicators across member states and sectors
will continue to make interpretation of data challenging going
forward. The initial estimates of GDP in Q4 2020 are a case in
point.
Of the eleven largest economies of the eurozone, Austria fared
worst (-4.3% q/q) and Spain and Portugal outperformed (both +0.4%
q/q). But these data points are in no way indicative of their
relative performances during the COVID-19 shock.
The latest retail sales data, for December last year, offer
another example of exceptionally "noisy" data. While Germany saw a
near-10% m/m collapse in sales volumes, France experienced a
20%-plus m/m rebound. Differences in the timing of COVID-19
restrictions in the eurozone's two largest member states
contributed to this unprecedented divergence. More than ever
before, individual data points need to be set in the wider economic
context.
Posted 22 February 2021 by Ken Wattret, Vice President, Economics, S&P Global Market Intelligence
