Eurozone GDP in Q3 surprised on the upside with growth of 2.2% q/q, driven by strong support from private consumption. But going forward, the outlook for Q4 is less bright. High-frequency indicators, even before the increase in Covid infections (see figure 2), were pointing to a slowdown in momentum. The recent surge in Covid cases has put the health situation back under the spotlight. While the vaccination campaigns mean the medical situation is less threatening for the economy than a year ago, some governments have already announced a tightening of measures.

Outlook for the eurozone deteriorating…

Overall, the sharp rise in Europe’s Covid cases and the emergence of the Omicron variant have led us to lower our GDP forecast (see figure 1). We now see a sharp slowdown in growth in Q4 2021 and Q1 2022 before returning to strength in the rest of 2022, so we have cut our 2021 GDP growth forecast to 5.0% from 5.1% last month, and now see 4.0% growth in 2022 (down from 4.2%) given weaker starting point.

…but 2022 still set to be a robust year

We still expect another year of solid growth in 2022 – close to 4% – but the recovery is likely to be choppy due to resurgent Covid risks, supply-chain problems and high energy prices.

• Consumption prospects remain positive for the medium term: our forecast continues to rest heavily on the shoulders of consumers. We expect consumer spending to grow by 6.2% in 2022 – by far the strongest driver of our GDP growth forecast. Our optimistic view rests on two basic dynamics: the positive prospects for real incomes in 2022, and the vast amount of savings accumulated by households. But the short-term dynamics will clearly be more negative, with consumption seen stalling in Q4 and growing by below 1% in Q1 next year. Moreover, a severe deterioration of the health situation could mean consumers voluntarily decide to limit contact-intensive activities due to health concerns. We think this risk is limited by the protection offered by vaccines, which means new Covid waves are much less serious than they were in 2020, but some risks remain, as is clear from the Omicron variant.
• Investment could surprise to the upside: despite the problems plaguing the industrial sector, we expect a strong cycle for capital spending. Part of this is driven by the large boost provided by the Next Generation EU recovery plan, but the wide gap currently seen between industrial orders and production should translate into an eventual rebound in output when capacity constraints are removed and orders are filled. We see investment expanding by 4.6% next year.
• Trade is weakening but services will support growth in H2 2022: as global trade growth has peaked, we expect goods exports to slow next year. But with services seen picking up strongly in H2, we expect total export volumes to rise by 5% in 2022.
• Higher inflation reaches the eurozone: November headline inflation picked up to 4.9%. The surge in prices was mainly driven by higher energy prices, but most other components saw marked accelerations. Core inflation came in surprisingly strong at 2.6% y/y, up from 2.1% in October. This increase was driven by strong services inflation, up 2.7%, probably linked to a surge in package holiday prices in Germany. Inflation continues to surprise to the upside in the short term and risks of inflation pressures broadening are on the rise if the increase in services prices does not reverse. But we see little evidence that the medium-term outlook for inflation has changed significantly from a few months ago. In fact, we see a high probability that ‘lowflation’ will make a comeback late next year. We expect inflation to fall swiftly in H2 next year, heading towards 1% in Q4 2022 and at the start of 2023.

Il seguente è un estratto di un pezzo uscito sul sito di Oxford Economics in data 09 Dicembre.