European economic recovery is accompanied by multiple risks

Affected by the epidemic, the European economy fell into recession in the first half of the year. Recently, the overall recovery of the European economy has shown momentum, but the economic performance is still mixed, accompanied by risks.


The recovery momentum is showing

According to data released by Eurostat on August 14th, the gross domestic product (GDP) of the EU and the Eurozone in the second quarter shrank by 11.7% and 12.1% respectively from the previous quarter, and the single-season shrinkage was the highest since the EU started relevant statistics in 1995. Germany, France, Italy, Spain and other 10 countries experienced double-digit economic contraction in the second quarter. Among them, Spain's economy contracted the most month-on-month, reaching 18.5%. Lithuania, the smallest drop, also fell 5.1% from the previous month. The month-on-month declines of the European integration "engines" France and Germany reached 13.8% and 10.1% respectively.

Philip Ryan, a member of the European Central Bank’s Executive Committee, pointed out that although the European economy has been hit hard in the first quarter, the extensive "blocking" measures have been implemented mainly from April. The most serious impact of the epidemic on the European economy appeared in the second quarter.

It can be seen from the data that the 10.1% recession in Germany, the largest European economy, is lower than the 12.1% in the Eurozone and 11.7% in the European Union.

The dismal economic data in the second quarter is expected. However, the data also shows that with the gradual recovery of production and life, the recovery of the European economy has strengthened.

Eurostat said on August 5 that in the first six months of this year, the average level of retail sales in the euro area fell by only 4.2%. In June, retail sales in the entire euro area increased by 5.7% over May, which was a record drop in April. After that, the indicator continued to recover for two consecutive months. At present, retail sales in the Eurozone have returned to their pre-crisis levels in February.

The Eurozone Economic Sentiment Index released by the European Commission rose significantly in July, mainly due to the substantial increase in confidence in the industrial, service and retail industries, and the stability of consumer confidence.

The economic situation forecast report released by the European Economic Research Center in Mannheim, Germany on August 11 showed that the economic confidence indexes of Germany and the Eurozone in August were better than expected. The report shows that the index reflecting investor confidence in the German economy in the next six months has risen again, which is significantly higher than economists’ previous expectations. The index fell slightly in July, and institutional investors had generally expected that August will continue a slight decline. The euro zone economic confidence index rose significantly more than expected that month.

The head of the European Economic Research Center, Achim Wambach, said that the hope for a rapid economic recovery continues to grow, and experts expect to see an overall recovery, especially the German economy.

According to data released by the market research agency Eschen Huamai, the Eurozone Manufacturing Purchasing Managers Index (PMI) rose to 51.8 in July from 47.4 in June, marking the first time since the beginning of 2019 to stand on the line of prosperity and decline 50, indicating that the euro The district's manufacturing industry began to expand.

Chris Williamson, economist at Exin Huamai, said that the third quarter of the Eurozone manufacturing industry had a good start, and manufacturing output is expected to increase further in August.

Analysts believe that thanks to the effectiveness of the epidemic prevention and control measures and the large amount of money printed by the European Central Bank, the European Union and its member states’ governments provided timely “blood transfusions” to the real sector. The European economy began to rebound after “bottoming” in April. 7 Since the beginning of the month, the economic recovery has strengthened.


Eurozone liquidity is not optimistic

Affected by the new crown pneumonia epidemic, the inflation rate in the euro zone has continued to fall. Data released by the Federal Statistical Office of Germany on August 13 showed that due to factors such as lower value-added tax rates and falling energy prices, the German inflation rate in July was negative 0.1%. German energy prices fell 6.7% year-on-year that month, continuing to have a "downward impact" on the month's inflation rate. Excluding the impact of energy prices, the German inflation rate for the month was 0.8%. In addition, food prices rose 1.2% year-on-year in the month, of which fruit and meat product prices rose 7.8% and 5.4% year-on-year respectively. The German Bundesbank (Bundesbank) previously predicted that the German inflation rate this year will be 0.8%, which will be far below the 2% inflation target set by the Eurozone.

In this context, the European Central Bank decided in early June to further expand the scale of quantitative easing in an effort to ensure liquidity in the euro area and support economic recovery.

The medium-term financial stability risks in the Eurozone are also rising significantly. European Central Bank Vice President De Jindos pointed out that many highly leveraged companies face challenges such as tight cash flow, increased financing costs, and supply chain disruption. For euro zone countries with limited fiscal space, increased debt may lead to debt sustainability issues in the future.

De Jindos emphasized that the resilience of the financial system is essential to the recovery of the European economy, the most important of which is to ensure that the financial market is functioning well and to protect corporate and household loans.

A recent research report by the German Iver Institute for Economic Research pointed out that the liquidity situation of many euro area companies is rapidly deteriorating, and a large number of insolvency may occur, which will interfere with the economic recovery and bring greater than expected to the banking industry. problem. Due to reduced incomes and worsening labor market conditions, many families may also experience payment difficulties.

Wanbach pointed out that the banking industry and insurance companies still have poor earnings expectations for the next six months, which is worrying.

In addition, Paul Gentiloni, the European Commissioner for Economic Affairs, pointed out that unlike the United States, the unemployment rate in Europe rose significantly slower than the economic downturn during the epidemic, and the short-term work system played an important role in it. However, the short-term work system lasts for a limited period of time, does not help maintain long-term employment relationships, and does not increase people’s income.


The European Central Bank's easing is hard to increase

Although various economies have launched large-scale economic stimulus plans, the biggest feature of the world economy under the epidemic is still "uncertainty", and this is also true for Europe. Analysts said that countries are facing tremendous pressure to resume work and production. Only under the premise of preventing and controlling the epidemic can it be possible to turn "uncertainty" into "certainty" and promote sustained and stable economic recovery.

According to the predictions of major research institutions, on the premise that there is no "second wave of epidemic" and large-scale "second bans", the European economy is expected to regain growth in the second half of the year, but there is still a long way to go before the epidemic. The way to go.

The European Central Bank pointed out that economic output in the Eurozone will not be able to return to its pre-epidemic level at the end of 2022 at the earliest, and the recovery trajectory is highly uncertain.

Analysts believe that the biggest uncertainty in the current economic recovery in Europe is still the change of the epidemic, and the risk of "second ban" has not yet been ruled out. In particular, the number of new confirmed cases in a single day in Europe continues to rise recently, and the infected population tends to be younger.

Another analysis pointed out that under the epidemic, weak global trade and damage to the supply chain continue to affect European external demand. The EU and the United Kingdom's negotiations on future relations are pending. The extent to which European domestic demand can return to normal is also full of uncertainty. Therefore, sustained and A stable and balanced economic recovery is not easy for Europe.

At present, analysts generally predict that the European Central Bank will not introduce further easing policies for the time being. European Central Bank policymakers have so far avoided increasing negative interest rates. The scale and speed of asset purchases launched by the Central Bank are more appropriate.