Europe’s economy is starting to follow the familiar script of lagging its international peers when recovering from a crisis.
That was the upshot of the International Monetary Fund’s (IMF) forecasts on Tuesday, which downgraded the growth outlook for 2021 across Europe and underscored a generally poorer performance compared with China and the US
Such diverging fortunes reflect the stringency of lockdowns across the euro zone to contain the coronavirus, as well as a late and stumbling vaccination campaign — headwinds that threaten to deepen what already looks likely to be a double-dip recession. Political unease over the future leadership of Germany and a crisis in Italy are compounding the gloom.
By contrast, China is fulfilling a V-shaped recovery, and the US is strutting more confidently with a new president overseeing an extra stimulus injection and a more aggressive vaccine effort.
“We’ve started the year on a softer footing, particularly in Europe, because much of Europe seems to have gone back into recession,” Janet Henry, chief global economist at HSBC Holdings Plc in London, told Bloomberg Television. “China is already back above pre-pandemic levels and, on our projections, the US will be by the end of 2021. For the euro zone, it’ll be the end of 2022.”
That divergence was emphasized in the IMF’s forecasts, which showed euro-area gross domestic product rising only 4.2% this year, after falling 7.2% in 2020. The US economy is seen expanding 5.1%, more than recouping last year’s 3.4% contraction.
The most immediate cause of Europe’s relative weakness is the need for stricter and longer lockdowns to combat a resurgent coronavirus outbreak, and to contain nastier strains of the disease.
As European Central Bank President Christine Lagarde put it last week, a contraction in the fourth quarter will now “travel” into the first three months of the year.
“The short-term risk is tilted to the downside,” she added somberly. “Uncertainty is in the air.”
What Bloomberg Economics Says…
“Under pessimistic assumptions about how long restrictions will last, we now estimate that the euro-area economy will experience a deep contraction in 1Q. That will mark the second technical recession in the region as a result of the pandemic.”
–Jamie Rush and David Powell.
Sluggish immunization programs also threaten to widen the disparity between Europe and the rest. The European Union’s best performers in that regard, tiny Malta and Denmark, have administered only around 4 shots per 100 people. The U.S. has managed 7 and the UK is above 10. The EU is now in a standoff with AstraZeneca Plc over delayed vaccine deliveries.
With such shortcomings likely to cement lockdowns even further, the contrast in economic destinies is looking stark, with banks including Barclays Plc pointing to an “Atlantic divide.”
“The US outlook is improving, Europe’s is deteriorating” BofA Global Research’s economics team wrote in a report. “Don’t think of both economies’ recovery prospects as equal.”
Such a trajectory evokes the frequent impression that Europe has become a natural economic laggard to the rest. That sense has persisted for much of the current century, not least after the region’s sovereign-debt crisis impaired its recovery from the global financial crash a decade ago, while the U.S. and China powered ahead, at least in relative terms.
Newfound political disarray is only serving to highlight Europe’s listlessness. Post-Brexit trade curbs with the UK are already an irksome reminder of the recent trauma of divorce disfiguring the region.
Meanwhile, the succession to Germany’s Angela Merkel is still unresolved, keeping open the question of how the bloc will galvanize itself into fighting crises in the era after she leaves. Even after a candidate to replace her as chancellor is settled, an election in September — no doubt followed by coalition talks — will prolong the drift.
The sudden resignation of Italian Prime Minister Giuseppe Conte, against a backdrop of burgeoning debt obligations, also shows how turmoil is never far from erupting somewhere in the region. The country has been the focus of the EU’s efforts to forge a joint recovery fund to shore up the integrity of its common currency.
Clinging to Hope
For all their potential despair, European policy makers can still cling to hopes that their economies remain sound beneath the surface.
Government support programs in the region have tended to be highly targeted toward keeping companies and jobs afloat even when output is shut down, possibly avoiding unnecessary destruction to growth potential.
“Economies are being held in an imperfect state of suspended animation, and by and large it keeps underlying economies healthy,” said Kallum Pickering, an economist at Berenberg. “My hunch actually is that there’s a bit less scarring than most people think.”
In any case, Europe’s finance chiefs are now resigning themselves to being patient for when vaccination setbacks can be cleared, and the pandemic tamed, so that their economies can finally be unleashed — even if that happens far later than global rivals.
“We have to divide the year 2021 in two parts,” French Finance Minister Bruno Le Maire said in a Bloomberg Television interview. “We have everything that is required to have a very strong, very quick rebound as soon as the pandemic is over.”
Dutch central bank Governor Klaas Knot shares that view — but also cautions that there will be a long road ahead to repair the damage.
“There is optimism, but then of course we will be stuck with the legacy of the corona pandemic,” he told Bloomberg Television. “Output will be below potential for some time to come.”