Europe casts aside double-dip slump as growth restarts

Bloomberg

Europe’s economy is finally turning the corner from its worst crisis in the postwar
period after a devastating
double-dip recession.
Grim confirmation of another slump in the first quarter still failed to dim prospects for the region that are as bright as they have been since the pandemic struck, with European Union-funded multi-year stimulus plans also finally taking form last week, and a growth pickup
probably already under way.
The fiscal firepower waiting to be unleashed — mostly on Europe’s weak southern economies — is almost unprecedented and complements central bank emergency support that is locked in well into 2022. The completion of a belated vaccination push looks increasingly like the key remaining unfinished business to secure a sustained rebound.
Indeed, the prospect of EU cash flowing as soon as July, with reopenings appearing plausible, mean a recovery is tangible enough for European Central Bank officials to start talking within weeks about slowing stimulus — so long as progress on jabs keeps coming.
Another sign of the euro zone’s gathering momentum revealed itself on Monday with an index of purchasing managers showing manufacturing activity at the highest level in survey’s 24-year history.
The EU fiscal stimulus is designed to sustain the economic pickup after it takes hold, focusing most on the region’s perennially weaker members while dragging it in a greener and more digitalised direction.
Italy, the biggest beneficiary of aid and arguably the region’s toughest growth challenge, has lined up grants, loans and its own top-up to ensure a flow of $316 billion in spending.
Such is the scope and duration of the bloc’s stimulus plans that some economists are prepared to be optimistic on its outlook.
S&P says the overall effort could boost gross domestic product in the bloc by as much as 4.1% in the next five years.
The damage to repair is widespread, with the economy having gone through two recessions since the coronavirus struck, most recently shrinking 0.6% in the first quarter. That’s on top of a tumultuous decade after the 2008 financial crisis, when much of southern Europe contended with stagnation or deflation.
While the EU fund is designed to change that narrative, officials know that throwing money at the problem isn’t enough, not least if implementation then falls short in countries with creaking bureaucracy such as Italy.
The extent of euro-area’s ills is also such that even a once-in-a-generation stimulus worth more than 800 billion euros, on top of national support packages, might still be insufficient to shift destiny of its weaker members, not least if they don’t concurrently pursue pro-growth reforms.

“The hope is that when you reform public administration and render it more efficient, it helps absorb these investments,” said Felix Huefner, an economist at UBS AG in Frankfurt. “But it’s clear that with such a large amount of money, this is a big challenge.”
The extent of the euro-area’s ills is also such that even a once-in-a-generation stimulus worth more than 800 billion euros, on top of national support packages, might still be insufficient to shift the destiny of its weaker members, not least if they don’t concurrently pursue pro-growth reforms.
In Spain, for example, “the government thinks it will significantly elevate long term growth and reduce inequality,” said Miguel Cardoso, chief economist for Spain at BBVA. “For this to happen, we need an ambitious labor-market reform.”
For now, the prospect of a huge fiscal stimulus coming, combined with existing monetary support, is bolstering the outlook for a robust recovery. ECB Chief Economist Philip Lane even said on Thursday that the economy is at “an inflection point.”
For his central bank colleagues, that augurs a difficult discussion as soon as their June 10 meeting on whether to start slowing emergency bond purchases.
But for that debate to take place, just as for the fiscal aid to work its magic, progress in vaccinations needs to advance. Some evidence of that emerged last week as Germany announced a record 1.1 million jabs on a single day, while Italy managed to exceed 500,000 for the first time.
“The first priority for Europe is to get the vaccination strategy right,” said Fabio Balboni, an economist with HSBC Holdings Plc. “Until when restrictions are no longer in place, in our view, it’s a little bit like pumping air in a balloon that’s in a box.”