European economy may surprise positively

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In the first quarter, economic growth forecasts for the US economy were continually revised upwards, helped by rapid vaccinations and strong government support programmes. Now it seems to be Europe’s turn. Vaccinations are accelerating, but the real difference is made by Europeans’ penchant for going on holiday. The first positive adjustment to European growth is already there. According to the European Commission, the eurozone will recover faster than expected from the coronapandemic. According to the latest forecast, growth in the European region will reach 4.3 percent in 2021. In February, the European Commission was still expecting growth of 3.8 percent. The commission cites household consumption, investment, and European exports as the main drivers. In the second half of the year, the European aid package of 750 billion euros will be added. Nevertheless, the European Commission is still too conservative with its expectations. Europeans like to go on holiday and that makes a world of difference this year. 

Countries like Portugal, Spain, and Greece are open to tourists again. Given the speed of vaccination, more countries will open up before the summer. There will not be a full recovery yet, but it will be a much better season than last year. Last year, summer was almost completely ruined by the corona crisis. Partly because of that, everyone is ready for a holiday this year. By being forced to sit at home, everyone has also been able to save for a holiday. Consumer confidence has clearly increased due to the vaccinations in recent months. Europe is also working on a green certificate that will make it easier to travel freely within Europe. Even the Americans are allowed to travel to Europe again. Bookings are already higher than last year. People think they have sat at home long enough and dare to travel. However, it is understandable that many people wait and only decide on their holiday at the last minute. Since the Mediterranean countries, in particular, are heavily dependent on tourism, they may surprise positively this year. Last year, half to three-quarters of the sharp decline in economic growth there could be explained by the disappointing tourist season.  

Europe will also benefit above average from the global investment upswing. Whereas American companies mainly focus on the consumer, European companies have to rely much more on investments in, among other things, capital goods. These usually follow somewhat later in the cycle. The European economy has a more cyclical character anyway, and it helps when the world economy shows the strongest growth in more than 40 years. Furthermore, Europe is leading the way in terms of energy transition and this will become an important export product for European companies. The European industry is currently still suffering from the shortage of semiconductors, which caused the European automotive industry, for example, to reduce its production by more than ten percent between November last year and February this year. The shortage of semiconductors is not limited to the automotive industry, but fortunately, it is not a permanent problem. As soon as chips can be delivered again, production can also recover quickly. Apart from chips, worldwide stocks in the business sector are low, something from which the European industry can also benefit. The only point of contention is when strong demand combined with supply-side problems translates into higher inflation rates. Fortunately, unlike in the United States, there is not yet a shortage of personnel here. A wage-price spiral in the short term is unlikely. According to the European Commission, inflation rates will remain below the ECB’s target this year and next. The likelihood of overheating in the eurozone seems small, but we have seen in the United States that it can happen quickly. 

European political risk has decreased with the arrival of Super Mario. The Italian economy has performed poorly since the introduction of the euro and expectations of Italy are therefore low. Any signal that Draghi will succeed in implementing structural reforms will be greeted positively by investors. Many investors from outside Europe had two reasons for being cautious about European investments in recent years. Firstly, there was the Brexit, with potentially negative consequences for the continent. Then there was the Italian political risk, which put the continued existence of the euro and the European Union at risk. Within a few months, both risks faded into the background. There are still elections in Germany and France within a year. In Germany, the Greens may succeed in becoming the largest party, something that could increase the investment impulse of the European Green Deal. In France, Macron will face Le Pen next year, but it is possible that the European economy will have recovered enough to take the wind out of Le Pen’s sails. The French are also keen to return to the Mediterranean. If Macron succeeds this year, he will not only help the European economy but also his own re-election. Investors are always looking for positive surprises. With economic growth peaking in China in the first quarter and the United States set to peak in the second, it is now up to Europe to surprise positively.

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