BlackRock Investment Institute

Macro insights

Delayed, not derailed

Many European countries are postponing their economic reopening amid rising infection rates and a sluggish vaccine rollout. These disruptions will likely delay the region’s activity restart – but not derail it – in our view.

Activity restart intact

Activity restart intact

Sources: BlackRock Investment Institute, Markit, with data from Refinitiv Datastream and Haver Analytics, April 2021. Notes: The chart shows the actual (solid lines) and projected paths (dotted lines) of real GDP in the U.S., euro area, UK and China. Projections are based on the latest available Reuters consensus and include the estimated impact of U.S. fiscal stimulus and European vaccine rollout delays.

We see euro area activity returning to its pre-Covid levels before the year-end – slightly later than earlier expectations and about six months behind the U.S. See the chart. Countries more reliant on tourism are likely more vulnerable because limitations on international travel threaten summer activity again this year, in our view.

As  a result, GDP growth forecasts for Europe are being downgraded – a stark contrast to the U.S. where faster-than-expected rollout of the vaccinations together and large fiscal stimulus have triggered further growth forecast upgrades in recent weeks. This transatlantic divide is also echoed in the high frequency data we track, such as credit card transactions.

Yet vaccinations are continuing apace. We expect major European countries to have administered 50 doses per 100 people by late July as jab rates are expected to pick up as supply constraints ease in the course of the second quarter. See our Covid tracker.

We also expect pent-up demand to fuel a swift restart once economies open up over the fall. We estimate the euro area households have accumulated excess savings equivalent to about 8% of annual consumer spending over the past year. The expected consumption boost and the global restart led us to broaden our cyclical investment tilt last month, including upgrading European equities to neutral.

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