OECD Europe 1/2022

Euro-zone

Update on the latest developments

The growth dynamic in 4Q21 remained resilient, despite the rise of COVID-19 infections and associated necessary social distancing measures. In the meantime, growth in 2Q21 and 3Q21 was revised up by the statistical office, Eurostat, to now stand at a considerable level of 9.1% q-o-q SAAR in both quarters. It seems the combination of fiscal stimulus and accommodative monetary policy continued to support consumption and investment. The global trade recovery has been another supportive factor, especially for major exporters such as Germany, France and Italy.

Inflation rose further in December, continuing the rising trend seen in November and October. Despite this, the European Central Bank (ECB) currently appears to be willing to continue monetary stimulus. It is clear that inflationary developments have been further accentuated by global supply issues that have led to price rises for input goods, which has especially impacted the manufacturing sector. Inflation in the Euro-zone rose to 5% y-o-y in December, compared with 4.8% y-o-y in November and 4.1% y-o-y in October. When excluding volatile items such as food and energy, inflation stood at 2.6% y-o-y in December, compared with 2.4% y-o-y in November and 2.1% y-o-y in October. Positively, supported by ECB monetary easing, lending to the private sector by financial institutions continued expanding again in November, rising by a further 3.3% y-o-y, after reaching 2.8% y-o-y in October.

The labour market continued to see improvements. According to the latest numbers from Eurostat, the unemployment rate stood at 7.2% in November, compared with 7.3% in October and 7.4% in September.

Retail sales rose on a yearly base in value terms, with growth of 11.8% y-o-y seen in November. However, this still represents a decline over November last year. Hence, the monthly development is of greater importance as a comparison. November saw an increase of 1.2% m-o-m, compared with a rise of 0.8% m-o-m in October.

Industrial production declined in November, falling by 1.2% y-o-y, compared with a small rise of 0.4% y-o-y in October and 3.9% y-o-y in September. This translates into a monthly rise of 2.2% m-o-m in November, compared with a monthly decline of 1.3% m-o-m in October and 0.9% m-o-m in September.

Near-term expectations

The Euro-zone is forecast to remain impacted by a rise in COVID-19 infections due to the Omicron variant. Thus, after experiencing an already lacklustre 4Q21, 1Q22 is forecast to see slowing activity, especially in consumption and investment. It is, however, expected that after relatively lower growth in winter, activity will gain pace again, as it did the previous two years. Hence, the seasonality of COVID-19 is forecast to materialise again this year, considerably gaining momentum in 2Q22 and 3Q22. Meanwhile, the ECB has announced ongoing monetary support for the economy, which is expected to be only gradually reduced throughout 2022. Moreover, ongoing fiscal stimulus is forecast to counterbalance some of the negative impacts of the COVID-19 situation in 4Q21 and 1Q22.

The underlying assumptions for the near-term GDP growth dynamic have not changed. It is anticipated that COVID-19 containment efforts in 4Q21 and beyond will be effective enough to avoid derailment of the economy. Moreover, supply chain issues are expected to be temporary in nature and not negatively impact growth. Importantly, no major lockdown measures are forecast in the Euro-zone for 1Q22. With these assumptions, 1Q22 growth is forecast to rise by 2% q-o-q SAAR, impacted by the requirement for social distancing due to the rise in COVID-19 infections. A considerable gain in momentum is expected for 2Q22 of 3.2% q-o-q SAAR. This momentum is also forecast to gain pace for all of 2H22, reaching growth in both 3Q22 and 4Q22 of 3.6% q-o-q SAAR.

The Euro-zone’s December PMI pointed to ongoing momentum in the manufacturing and services sectors, albeit reflecting a slow-down in activity due to COVID-19. The PMI for services, the largest sector in the Euro-zone, fell to 53.1 in December, compared with 55.9 in November and 54.6 in October. The manufacturing PMI remained almost unchanged to stand at 58 in December, compared with 58.4 in November.

The easing of lockdown measures once again led to stronger-than-expected growth figures in 2Q21 and 3Q21. Hence, 2021 GDP growth was revised up to stand at 5.2% compared with 5.1% from last month.

GDP growth in 2022 is forecast to slow, similar to other OECD economies, though remaining at 3.9%, unchanged from November’s MOMR.

                              Euro-zone

2021                               5.2

Change from previous month         0.1

2022                               3.9

Change from previous month         0.0