The eurozone economy is set for a sharp recovery in the second half of 2021, as economic sentiment surged in April after the region’s vaccination programme finally gained momentum.
The European Commission's monthly sentiment survey for the 19 countries sharing the euro was more optimistic on Thursday, rising to 110.3 points in April from 100.9 in March.
The upbeat mood came as European Central Bank president Christine Lagarde said the eurozone economy was set for rapid growth in the second half of the year thanks to faster distribution of vaccines, which will allow life to return to normal.
UBS Global Wealth Management said vaccination progress suggests the eurozone will not be far behind the US and UK when it comes to easing restrictions.
“We continue to expect the eurozone economy to experience a sharp recovery in the second half of this year,” UBS said.
“An additional boost for eurozone activity is likely to come from its exposure to the global economic rebound.”
This sentiment was backed up by Ms Lagarde, who told an online event of the Aspen Security Forum on Wednesday that she was optimistic for the economy.
"By all accounts it seems that by the end of June, about 70 per cent of the population should be vaccinated at least with the first jab," Ms Lagarde said.
Eurozone output contracted 6.6 per cent in 2020 after the region was hammered by the pandemic. The economic bloc's recovery was hampered by a third wave of the coronavirus and a haphazard start to its vaccination campaign.
But Ms Lagarde said vaccines provide the "light at the end of the tunnel", so there was no reason to alter the ECB's projections for 4 per cent growth over the full year.
Europe’s ambitious Nest Generation EU plan is now ramping up with a number of member states submitting their national recovery plan to the European Commission this week, to receive the first disbursements from the EU’s €750bn ($908.06bn) Recovery and Resilience Plan.
Italy's economy and health system was severely affected by the pandemic, with the country set to receive one of the largest shares of the fund unveiled last year to support member states in recovering from the crisis.
This week, Italy's Prime Minister Mario Draghi said the destiny of the country depended on the success on the €248bn package of investments and reforms to repair his country's economy, of which €191.5bn is coming from EU funds.
Morgan Stanley said on Thursday that Italy's Recovery Plan can set its economy on a sustained higher growth track, although the near-term effects are more uncertain.
“The package has the potential to significantly raise Italian GDP growth in the medium term for at least two reasons. First, the plan is aimed at financing new investment projects with a high long-term return, namely infrastructure investments with a green or a digital tag," Morgan Stanley said.
“Second, the potential of the plan is further reinforced by the significant slack in the Italian economy. We think that increase in public investment has the ability to crowd-in private investment and consumption, especially if the government succeeds in passing the supply side structural reforms included in the plan, which aim at cutting red tape and making the country more business-friendly.”
France and Germany jointly presented their national recovery plan with grants of about €25bn and €40bn respectively, which will largely focus on greener economy and progress in digitalisation.
“With Germany dedicating 90 per cent and France 75 per cent to these two matters, both countries exceed the requirement outlined by the European Commission,” UBS said.
“In the short term, we expect the market reaction to these plans to be largely favourable. The absence of a delay to the monies being deployed should lend greater credibility to Europe's expected economic recovery.”
However, the eurozone economy still has some work to do. Less than a quarter of the bloc’s population have received their first dose of a vaccine and much of Europe remains in lockdown.
Services, which incorporate the sectors most affected by lockdowns, have felt the brunt of the impact, while goods production has fared much better, helped in part by strong demand from overseas.
“Nevertheless, many parts of the manufacturing sector in the eurozone continue to operate below full capacity. Disruptions to supply chains, bottlenecks caused by shipping delays, and the ongoing impact of social distancing have all contributed,” UBS said.
With vaccine supply bottlenecks expected to ease in the coming months, the mood has become much more positive.
The European Commission's monthly sentiment survey found that industrial confidence rose to 10.7 points in April from 2.1 in March.
In services, the eurozone's biggest sector responsible for more than two thirds of GDP, the mood was also more upbeat with the reading rising to 2.1 points from minus 9.6 in March.
Consumer optimism increased to minus 8.1 from minus 10.8, while the manufacturing industry's selling price expectations rose to 24.1 points in April from 17.5 in March, nearing its highest reading since March 2011.
The rise in economic confidence added to signs that the region is starting to recover, with the German government this week raising its growth forecast for the year to 3.5 per cent and expressing confidence that consumer spending will take off once the pandemic is under control.
The positive mood will boost the euro’s prospects against a weaker US dollar this year. The euro was trading at $1.2119 against the dollar at 2.06pm London time on Thursday, with USB expecting the pairing to reach $1.25 by the end of the year.
“As the global economy heals, investors are likely to diversify their current exposure away from the US dollar," the bank said.
"The corresponding increase in demand for eurozone exports will create further demand for euros, which will be another factor pushing the currency higher."