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Vaccine rollout stings Europe’s outlook

ANZ Research has downgraded its economic growth forecast for the euro area. Given the slower-than-expected vaccine rollout, the team now expects the region’s gross domestic product to increase 4 per cent in calendar 2021, down from previous forecasts of 5 per cent.

The downgrade reflects the extended social distancing restrictions across the region and the slow rollout of vaccines, which could cut first-quarter GDP by 1.0 per cent, quarter on quarter. Slow planning of the vaccination program and serum production difficulties have contributed to low inoculation rates across the EA - around 7.0 per cent of the population - so far.

Many restrictions are now expected to remain in place into the second quarter, meaning national disparities could lead to an uneven recovery.

ANZ Research does not expect a robust cyclical recovery for the euro area economy to emerge before the middle of 2021. As seen in the third quarter of 2020, demand can bounce back strongly once restrictions lift.

The stimulus from recovery funding will be filtering through, and the current high savings rate implies pent-up demand, which can cascade through to higher spending.

The recovery in global trade volumes will also benefit EA output. Because of the slower start to 2021, ANZ Research anticipates 2022 growth will now be stronger (4.7 per cent, compared to previous forecasts of 4.2 per cent).


In the final quarter on 2020, an estimated 6 to 7 per cent of the euro area’s 165 million workers were either on short-term work schemes or temporarily laid off. Because those people remain on company payrolls through government support, the rise in ‘official’ EA unemployment has been muted. Notwithstanding that, 1.52 million people lost jobs in 2020.

Inflation in January was considerably stronger than expected, owing to an absence of New Year sales. That meant base effects pushed core inflation up to 1.4 per cent year on year, its highest level in five years.

The effects of pandemic restrictions, higher oil prices and index weight changes mean inflation may be noisy in coming months. ANZ Research has revised its 2021 inflation forecast for the euro area to 1.2 per cent, up from 0.7 per cent previously.


Over the course of the pandemic, the ECB’s balance sheet has grown by 20 per cent of nominal gross domestic product. Providing liquidity and an accommodating monetary policy have been the main features of the ECB’s pandemic toolkit. ANZ Research does not see that changing until mid-2022 at the earliest.

One of the positive outcomes of the ECB’s focused liquidity provision has been to support credit growth to the non-financial corporate sector. Government loan guarantees have helped. Such policies have been instrumental in avoiding a credit crunch, the opposite of what happened following the global financial crisis.

Euro-area credit standards barely tightened in the early stages of the pandemic, possibly owing to ‘below-the-line’ fiscal initiatives. However, lending standards are now clearly tightening.

The longer COVID-19 related restrictions remain in place, the more difficult it is for businesses to survive. Tightening standards could slow the growth in credit to non-financial corporations which would push back against ECB accommodation.


In January, euro area M3 money supply rose 12.5 per cent year on year to its highest pace since before the GFC. Owing to COVID-19 restrictions and the pace of the vaccine rollout, the ECB is committed to maintaining and extending monetary accommodation if necessary.

The disruption that restrictions have caused to consumer spending patterns is clearly visible in the sharp decline in consumer credit growth. Governments have adopted job support schemes which have supported incomes and curtailed the rise in unemployment.

The household savings rate and household deposits have risen as a consequence. Both indicate high levels of pent-up demand, which could flow into future GDP growth.  

The level of real M1 money supply growth closely correlates with real consumer expenditure. It is currently growing at around 15 per cent year on year, signalling the potential for consumer spending to charge ahead once conditions normalise.

Mortgage growth has also been firm, if not dynamic. As with other parts of the world, European households have shown a preference for single-family homes.

In spite of the subdued inflation outlook and ongoing restrictions, monetary settings have contributed to a robust recovery in the coincident indicator of activity which provides hope that the euro area economy can weather the storm.

The index is also reflecting strength in the manufacturing sector and resilience in economic and consumer surveys. EA growth looks poised to rebound smartly once pandemic restrictions ease.

Brain Martin is a Senior International Economist at ANZ

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