CRU: Eurozone growth momentum to slow but industry fares better

This year, the European economy is set to experience an unprecedented contraction in economic activity. The good news for the commodity sector is that the rebound in activity from lockdown lows has been rapid. Notably in the industrial sector, which by April had lost 27% of output, but has already regained ~75% of that loss. The bad news is that the growth momentum is expected to slow. CRU forecasts the industrial sector will return to pre-COVID-19 levels by 2021 Q2, quicker than the broader measure of GDP which is only expected to reach pre-crisis levels by mid-2022.

The gain after the lockdown pain

After the historic contraction in Q2, economic activity in the Eurozone is rebounding strongly: in Q3 we expect GDP to expand by 8.6% q/q, marking a substantial improvement from the low point of Q2. Following this initial strong rebound, we expect momentum to slow thereby only allowing output to return to pre-COVID-19 levels in 2022 Q2.

In Q2, the contraction was mainly driven by declines in private consumption and gross fixed capital formation (Figure 1). Similarly, net trade was a drag on growth owing to the unprecedented drop in global trade (-15% y/y in H1). In Q3, high-frequency indicators are pointing to a sharp rebound in private consumption as the easing of restrictions allowed consumers to return to spending. Consumption accounts for over 50% of GDP, so a quick recovery in private consumption means that the recovery in the third quarter will be strong. However, after this initial rebound, the path to recovery will slow. That is because we expect unemployment to increase and uncertainty about future job prospects to continue to weigh on consumers’ spending decisions. Against this backdrop, we see private consumption returning to pre-COVID-19 levels only in mid-2022.

Employment: outlook to worsen before it gets better

During the height of the pandemic, governments around Europe adopted drastic measures to limit the decline in employment as economic activity plummeted because of the lockdowns. Short-time work schemes, whereby employees are temporarily put off-work but still receive their wage (in part or in full) thanks to government transfers, have been of paramount importance. It is estimated that more than 40 million workers applied for such schemes.