July 29, 2020 / 12:11 AM / 6 days ago

Euro zone outlook gets slight boost from EU stimulus deal - Reuters poll

BENGALURU (Reuters) - Euro zone economic growth next year will be slightly stronger than previously thought, according to a Reuters poll of forecasters taken after European Union leaders agreed on 750 billion euros to support economies ravaged by the coronavirus.

FILE PHOTO: Euro coins are seen in front of displayed flag and map of European Union in this picture illustration taken in Zenica, May 28 2015. REUTERS/Dado Ruvic/File Photo

But economists surveyed July 22-28 also concluded it would take two or more years for euro zone gross domestic product to reach pre-COVID-19 levels, despite trillions of euros of stimulus from the European Central Bank and governments.

The deal, which was not unexpected but was decided earlier than many analysts had anticipated, will bring the EU to the capital markets as a borrower for the first time. But that economic stimulus won’t be felt until 2021.

About three-quarters of economists, or 29 of 38, said their confidence around the prospects for euro zone economies from next year onward had improved, including three who said it had significantly improved. But for now, they only marginally upgraded their growth forecasts.

“While the size of the fund is not large enough to be a game changer from a macroeconomic perspective, common issuance of this magnitude of debt is a historic step for Europe and represents a pivotal change in the way the EU tackles crises,” said Angel Talavera, head of European economics at Oxford Economics.

(Reuters Poll: Euro zone economic outlook - here)

Despite a surge of new infections in Spain, an early epicentre of the pandemic that has prompted fears of a second wave of infections, the region has emerged from stringent lockdowns after having handled the pandemic better than the United States.

However, nearly 70% of respondents to an extra question, or 26 of 38 economists, said it would take at least two years for euro zone GDP to reach pre-COVID-19 levels. Not one said it would take less than a year.

The wider Reuters poll of around nearly 60 forecasters predicted the economy would shrink 8.0% in 2020, the worst year since the single currency was launched. That will be followed by a 5.5% expansion in 2021, unchanged from the previous poll.

The latest poll showed GDP shrinking 11.8% this quarter compared with the first three months of the year, better than the 12.2% contraction forecast a week ago. It is then forecast to grow at 8.1% in the current quarter and 2.8% in the next compared with 8.3% and 3.1% earlier.

In 2021, the economy is predicted to expand 1.4% in the first quarter, unchanged from the previous poll, followed by 1.1%, 0.8% and 0.6% in the second, third and fourth quarters, slightly better than median predictions for growth at 1.0%, 0.6% and 0.6% made just before the deal was agreed.

“Given the size and extent of the shock, it (the EU stimulus) can only smooth things out, not completely cancel any of the negative factors,” said Yvan Mamalet, senior euro area economist at Societe Generale.

“We will probably see some second-round effects like an increasing unemployment rate and corporate defaults when it becomes clear that some of the demand will never be recovered.”

The euro zone’s two largest economies were forecast to make a sharper recovery in 2021 than expected in April, with Germany forecast to grow 4.7%, up from 4.4%, while for France 2021 growth was upgraded sharply to 7.3% from 4.2%.

The outlook for Italy, among the hardest-hit by the pandemic, was substantially brighter than in April, and is expected to grow 6.2% in 2021, up from previous predictions for an expansion of 5.0%.

As with most developed economies, the outlook for inflation has barely moved in recent months, expected to remain low. ECB rates are forecast to remain unchanged for several years.

(Reuters Poll: Euro zone economic growth outlook - here)

Reporting and polling by Richa Rebello and Sujith Pai; Editing by Ross Finley and Andrea Ricci

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