Austria has confined its population. Slovakia will do the same with the unvaccinated. Germany It returns to register a record of infections and the authorities describe the situation as a “national emergency”. United Kingdom imposes new restrictions, as Holland, which reaches its worst moment since winter.
Europe is threatened again by the threat of restrictions and lockdowns after the unexpected uptick of the pandemic in the last 30 days. It is true that while the incidence rises, hospital pressure and deaths remain below alarm levels, but the history of inaction has led the authorities of many countries to impose new mobility restrictions that would eventually have an impact on growth.
The proximity of Christmas implies an increased risk due to celebrations, family reunions and social events in countries with low vaccination rates. But it is also true that these events are part of the cycle of recovery and economic activity that we have been witnessing sequentially in recent quarters.
Therefore, an almost obligatory question arises: Is the economic recovery in Europe at risk?
The answer is not easy. And this is so because it does not depend exclusively on what happens in relation to a worsening of the situation. Is that the underlying trend is not entirely favorable.
It is true that, in terms of increase, the data offer a positive sequence, but normalization. After two quarters of strong upturn in the activity data, the nominal GDP of the euro zone is still below the level of 2019. And even more than the 2018 data with a gap of 5% in market value.
The inflation we know that it has been an unwanted guest that is beginning to do damage. At the moment on a low scale, but seeing that the temporality is a tall tale, facing a normalization of growth in 2022, with the expected levels of inflation, in the best of cases we will have zero real growth.
I have told it many times in this column to make people understand the damaging effect of an inflationary spiral. It is an indirect tax on consumption that also drains future expectations and is a mortal enemy for the saver. To prove that it is not just energy prices, the GDP deflator increases by 2% in annual terms. Production prices are skyrocketing and the prices of basic foodstuffs show inflation above 2%.
It is not surprising that the bureaucrats of the ECB insist on one side in a message as little credible as it is defensible. they know that if inflation remains highor at current levels, Europe is headed for stagflation without the ability to react in monetary or fiscal policy.
With more lockdowns, let’s hope not, and if the situation worsens in a month with the consequent halt in activity and private consumption, growth for Europe will surely be revised downwards again. The direct consequence is that the output gap it will be negative with the lowest historical room for manoeuvre, both fiscal and monetary.
If inflation remains high, or at current levels, Europe is headed for stagflation without the ability to react in monetary or fiscal policy
The euro-dollar, without being a reliable indicator in economic terms, it does help set expectations. Europe lags behind synchronized growth and that has led the euro to year lows. Unreliable sign. Since it slightly exceeded 1.22 dollars in May, it is currently trading at 1.128 or, what is the same, an exchange rate devaluation of almost 8%. Good for exporters, especially a relief for Europe’s growth engines (Germany and France) if it weren’t for the fact that all foreign exchange gains have been eaten up by variable transport, energy and material supply costs.
And here we come to another activity thermometer, the bags. The results of the quarter have confirmed that 80% of the sector, approximately, has recovered pre-pandemic levels. Many have far surpassed it. Not in vain, the EuroStoxx 50 recently reached the highest since the end of 2007 and faces its last resistance to return to levels prior to the bursting of the bubble dot com. Things would have to change a lot to think that from here the stock markets are going to combine an inflationary environment and pressure on margins with improvements in profitability. What applies to equities applies to debt and credit markets, where the bubble is equal to or greater. If nothing prevents it, Europe’s debt/GDP ratio will exceed 100% next year.
In short, the wind is turning face. At the moment, we are moving with inertia both economically and financially, and it should not be wasted. But let’s not cloud our eyes with what is potentially coming. Don’t say I didn’t tell.