Europe has been lagging the US and China this year. Eurozone GDP contracted by -0.6%QoQ in Q1’21 as the region’s slow pace of vaccinations and a sweeping third virus wave led to renewed lockdowns. In contrast, America’s and China’s economies both expanded in Q1’21.
The Eurozone’s weakness at the start of the year pushed the EUR down from 1.23 to a low of 1.17 against the USD. But the single currency has now rebounded to 1.21 versus the greenback with Europe set to become an engine of growth for the global economy in Q2’21.
First, Europe’s vaccinations are accelerating after the slow start to the year. The supply of jabs within the European Union is increasing in Q2’21 after being scarce in Q1’21. The European Commission therefore appears on track to meet its target of vaccinating 70% of adults in the EU by July. At the same time, new vaccines are being submitted for emergency approval by EU regulators. This will increase supply further over the next few weeks.
Second, Europe’s third wave of infections already appears to have peaked. New daily cases have been trending lower in most European countries, allowing restrictions on economic and social activity to start being lifted. This will enable Eurozone GDP to bounce back strongly in Q2’21 and Q3’21.
Third, Eurozone data is improving quickly.
Source: Bank of Singapore, Bloomberg
The region already has a strong finish to Q1’21 with March’s retail sales increasing by 2.7%MoM. In April and May, sentiment surveys have jumped sharply further. The chart shows confidence across the Eurozone has rebounded from depressed levels of 91.5 in January and 93.4 in February - as Europe’s third wave forced countries to lock down again - to 100.9 in March and 110.3 in April.
Similarly, Germany’s IFO index of business sentiment has increased significantly over March and April - as the chart shows - while Germany’s ZEW survey of investor expectations hit 84.4 in May, its highest level since the late 1990s internet stocks bubble.
Stronger growth prospects are likely to make the European Central Bank slow down its pace of quantitative easing when it next meets in June. In March, the ECB had been alarmed by the economy’s weakness while Eurozone government bond yields were rising as US Treasury yields surged on the back of America’s recovery. The central bank thus pledged to ‘significantly’ step up its asset purchases over Q2’21 to stop yields increasing too quickly. Europe’s reopening will now allow the ECB to scale back its bond buying in Q3’21.
Faster vaccinations, falling infections, stronger growth and slower ECB quantitative easing are all set to help the EUR rebound further. We forecast the currency will hit 1.25 versus the USD.Disclaimer applicable to recommendation
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