Earnings Call, Webinar
The European Recovery: Here to Stay?
- Vaccine rollout progress is expected to continue, keeping the Delta variant a manageable risk while significant reopening steps unlock pent-up demand through the summer.
- Services activity is anticipated to accelerate sharply in May and June, driving a strong pickup in activity and economic momentum significantly above consensus for Q2 and Q3.
- Economic growth is projected at 5.4% for the Euro area and 8.1% for the UK in 2021, with forward-looking indicators suggesting continued room for growth into the summer.
- National deficits are expected to shrink as the economy recovers into 2022, though the shift toward fiscal consolidation will be more gradual than historical precedents.
- The EU-wide recovery fund remains expansionary, adding approximately 1.5 percentage points to growth this year and half that next year, with funds stretching through 2026.
- The ECB is forecast to maintain a high pace of bond purchases with guidance toward a slight reduction in the summer, keeping policy highly accommodated until inflation rises.
- Interest rates are not expected to rise until 2025, while headline inflation is projected to peak in November as commodity prices and base effects push numbers higher.
- German headline inflation is forecast to reach 4% in November, with temporary factors dropping out in 2022 to cause a mechanical decline, while core inflation is expected to reach 1.5% sustainably by late 2024.
- Market positioning is expected to improve rapidly for European equities, with substantial appetite for banks, construction, cyclicals, and value stocks, particularly benefiting from rising interest rates.
- The SX5E is expected to continue outperforming the S&P and NASDAQ in the near future, driven by market optimism regarding a faster vaccination path in continental Europe relative to the US.
- Demand for Southern Europe, specifically Italy, is anticipated to show a notable uptick, with the summer characterized as a more pro-cyclical event.
- Risks to the outlook include the potential emergence of the Delta variant in Europe delaying recovery, the limited short-term impact of the UK's reopening delay, and the German election in September depending on the presence of the Greens.
- Political risks identified include a potential medium-term rift in Italy following the February presidential election and Draghi stepping down, as well as a "tail risk" of a French election outcome featuring a left-wing coalition or a runoff between Le Pen and Macron.
- A return to fiscal austerity could cause the region to revisit early 2010s risk themes, while structural effects of the pandemic and fiscal expansion are expected to draw European countries closer together.