Factors that will Shape the Recovery of the Eurozone in 2021

2020 has left a string of economic indicators that have broken records of the last decades. They include the falls in GDP, large public deficits, the collapse of hours worked, public debt. Now, everyone has high hopes for 2021, thanks to some vaccines against covid-19 that have already begun to be applied. New year’s economic indicators won’t make massive headlines, but they could lead to recovery and reveal some of the trends that will dominate the economy for years to come.

Angel Talavera, director of Oxford Economics for Europe, believes that uneven growth across countries and government financial support will mark recovery. The industry will continue to do better than services, and inflation will begin to rebound to midyear.

Solid growth

The Eurozone will experience the most substantial growth in its history. Still, the magnitude of the shock has been so immense that Talavera does not expect the Eurozone GDP to return to its pre-crisis level until early 2022. The speed of recovery will vary significantly between economies, he emphasizes.

Expansive tax policy

Fiscal policy is the second pillar on which recovery prospects depend. One of the few positive results of the coronavirus crisis is evidence that politicians have learned from past mistakes. This is particularly critical for Europe, which was the model of unjustified severity after the crises of 2008-2009 and 2012, which contributed to a slower recovery.

This financial support is preventing household income from falling dramatically and many businesses from closing. However, the levels of public debt being implemented reached levels not seen in decades. However, despite the rebound in debt levels this year, expansionary fiscal policy should not pose risks in the short term thanks to the European Central Bank’s monetary policy. 

The industry, better than the services 

Talavera expects the manufacturing sector to remain more resilient at the sector level than services in the short term. The services sector is much more intensive in human contact, while social distancing is easier in the industry sector.

The return of inflation for 2021

Another important issue will be the return of inflation this year. The ECB continues to predict negative inflation during the first part of the year. Still, then a combination of factors (oil, recovery, public spending, end of the VAT reduction in Germany) will raise prices again in the Eurozone.