The European economy “roars” again and everyone expects “a great second quarter”

European Economy
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The GDP of the Old Continent “has come back to life” and will continue on a roll until the end of the year.

The eurozone economy is on track for a great second quarter.” This is what many experts expect, who believe that the Gross Domestic Product (GDP) has recovered solidly between April and June and that the data will end up confirming, when they are known, what many indicators are already anticipating: that the GDP “has come back to life.

Expectations are very high, especially after the European statistical office, Eurostat, confirmed that the GDP of the euro zone had only fallen by 0.3% in the first quarter, less than initially expected. The reopening in the Old Continent, the progress that vaccination has taken and the increasingly better data on infections, despite the doubts that the spread of the Delta variant of Covid-19 (the one that emerged in India) is raising, encourage to optimism.

So say the strategists at Pantheon Macroeconomics. “The data continues to support our forecasts and those of the consensus that the economy of the euro area has roared again in the second quarter,” they say in one of their latest reports on the region, in which they explain that although it is to be expected that the downward trend in new cases “will reverse somewhat in the coming months, with the arrival on the European continent of the more virulent Delta variant”, they continue to think that “the virus is retreating enough to allow a uninterrupted reopening for the remainder of 2021”.

“For now, experience suggests that the Delta variant is a speed bump, not a wall,” say these analysts, who acknowledge that despite this, it will be necessary to be very aware of how this new strain is progressing in Europe, especially after having forced to the United Kingdom to postpone the de-escalation.

In any case, Pantheon is still confident of the rebound, and so they reiterate their opinion that the GDP of the euro zone will jump from 1.5% to 2% qoq in the second quarter. “We are confident that increased consumer spending is now the main driver of the acceleration of economic activity in the euro zone,” say analysts from this firm. They also point out that the main source of repressed demand will be in services, and although higher spending in this regard cannot be guaranteed, they believe that it “is likely” to occur.

Especially since one of the mainstays of the service sector, tourism, “is improving” despite the fact that “many travel restrictions were still in effect for much of the quarter.” “Everything suggests that the rebound will continue in the third quarter, but the risks are lurking,” say these experts, who suggest that supply problems “continue to be a shadow” and, although they predominate in the manufacturing sector, they are spreading to services, which could lead to problems.

“We suspect that supply constraints will continue to affect the economy until the end of this year. In addition, with the transfer of powers by governments to the regions in terms of measures against the coronavirus, restrictions at the regional level, mainly in Italy, Spain and Germany constitute a risk, especially in response to the Delta variant“, they point out in Pantheon.

INVESTORS NOT ENTHUSIASTIC ABOUT THE ECONOMY

In spite of everything, it seems that only the experts are really happy with the GDP. “It is not lost on us that investors are much less enthusiastic about the optimistic data than economists. This is not a surprise,” they say, because markets “have been valuing a world without the virus since November, when Pfizer reported that its vaccine was 95% effective, “so the rebound in activity as restrictions have been relaxed” only confirms the history that has driven markets in the last nine months. “

The problem, Pantheon analysts point out, is that “investors now fear the withdrawal of stimuli, as economic conditions improve”, and are very aware of every intervention made by members of the Federal Reserve or the European Central Bank ( ECB). The messages recently released by the Fed “have clearly spooked investors.”

“The key question is whether the markets will have a tantrum that derails the stifled demand driven by the rebound in economic activity. We do not think that will be the case, but if the economy behaves as we expect in the third quarter, there may be more volatility.”