BlackRock Investment Institute

Macro insights

The outlook for European growth

The interaction between the virus dynamics and the vaccine rollout will be the key driver of activity in Europe. A more easily transmitted virus and a sluggish start to vaccination campaigns means near-term delays to the economic restart, likely leading to downgrades of growth estimates. A fresh dip in near-term activity raises the risk of scarring of productive capacities. Yet we see this being limited by continued policy support that bridges incomes for households and corporates. See chart below. Overall, we continue to see the cumulative shortfall in economic activity – what matters most for asset prices – to be just a fraction of that seen after the global financial crisis.

Policy support on par with last year
Euro area fiscal and monetary support, 2020-21

Euro area fiscal and monetary support

Sources: BlackRock Investment Institute, with data from Haver Analytics, December 2020. Note: The orange bars show estimates of the discretionary fiscal measures in 2020 and 2021 in response to the pandemic. The purple bars show the direct central bank support via programs such as the euro area’s Targeted Longer-Term Refinancing Operations. The yellow bars show central bank purchases of sovereign debt. Bars of darker shades represent 2020, and those of lighter shades 2021.

Policy support for the euro area is crucial given the challenges the regional economy is likely to grapple with this year. These include potentially deepening discrepancies between core countries such as Germany and the periphery, tempered expectations of a services-led rebound in economic activity and the repercussion of Brexit. The ECB Governing Council already increased its Pandemic Emergency Purchase Programme (PEPP) by EUR 500 billion to a total of EUR 1850 billion in December and extended net purchases until at least March 2022. Investors will be curious to find out how the ECB’s new ‘financial conditions targeting’ approach also announced at that meeting will work in practice. We expect there will also be a lot of focus on the policy strategy review, notably on whether the ECB will join the Federal Reserve and commit to allowing inflation to overshoot to make up for past undershoots.

Recent macro insights

Inflation and the restart
U.S. inflation increased slightly slower in July than in previous months, the latest consumer price index (CPI) data showed.
Challenges to EM restart
Emerging markets are significantly lagging behind developed markets in the vaccination rollout as vaccine supply remains a challenge for many of them.
Restart, not a recovery
U.S. GDP surpasses its pre-pandemic level, meaning the overall GDP shortfall will only be a fraction of that of the global financial crisis.

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