The prospects for Europe’s recovery are promising, as the economy and inflation are on track, funding conditions remain favorable and the vaccination program is accelerating.
The European Central Bank at its last meeting, has decided to maintain in force all the measures taken to address the coronavirus crisis and to support the European economies. In particular, the ECB kept its key interest rate at 0%, the deposit rate at -0.50% and the marginal lending rate at 0.25%, while making a commitment to remain at current of lower levels the interest rates, until the outlook for inflation to converge to the level of 2%. In addition, asset purchases under the Pandemic Emergency Program (PEPP) of EUR 1,850 billion will continue at least until the end of March 2022 and which are expected to advance for next quarter at a significantly higher rate than the first months of 2021.
Furthermore, the acceleration of the vaccination process raises the optimism that the restrictive measures will be lifted in the coming months, despite the recent increase in cases and additional restrictive measures that governments are forced to impose, resulting in a significant reduction in economic activity.
An additional important factor that is expected to boost the recovery of the European economy is the increase in consumer spending, which is expected to expand significantly, mainly from the second half of the year. For instance, households have accumulated savings of EUR 500 billion in 2020 due to restrictions and which are expected to climb to EUR 840 billion by the beginning of the next year, which will push consumer spending up 3.1% in the Eurozone this year and by 7% in 2022. It is estimated that consumption will reach pre-pandemic levels before mid-2022.
However, there are still significant risks that could reverse the upper picture and create serious obstacles towards recovery, such as the slower opening of the economy due to new problems with vaccine distributions and the emergence of new mutations, labor market problems and high debt levels.