Economy: Gloomy start to the year in the euro zone

New year, new luck, as the saying goes.

However, the economy in the euro zone felt little of this in January.

The start of the year was rather gloomy.

Although the omicron wave is likely to have peaked in some countries, the high number of corona cases is a particular burden on service providers.

This is depressing the mood: Both the economic assessment indicator (ESI) collected by the EU Commission and the purchasing managers' index of the London-based Markit Institute fell in January.

At 52.4 points, however, the Markit index is above the 50-point threshold, which signals growth.

Svea Junge

Editor in Business.

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“The economy is likely to start 2022 with weak but positive growth in the first quarter,” says Felix Hüfner, chief economist at UBS Bank in Germany.

Jörg Krämer, chief economist at Commerzbank, is more cautious, but he also does not expect any overall decline in economic output in the euro area, at least in the winter months.

In contrast to service providers, the mood among industrial companies improved.

"A look in the rear-view mirror shows that the pain in the industry has eased a little recently," explains Krämer.

There are first signs that the supply bottlenecks are slowly subsiding.

The auto industry was able to increase its production significantly in the fall.

In the most recent surveys, slightly fewer companies are complaining about material shortages.

The German economy in particular benefits from this, which has so far lagged behind in the recovery due to its high proportion of industry.

The business climate index of the Munich Ifo Institute increased in January.

"As soon as the corona restrictions are relaxed and the material bottlenecks also subside from spring, Germany can exploit its catching-up potential," Kramer expects.

The German economy will reach the pre-crisis level in the summer.

The euro area, on the other hand, had already reached its pre-crisis level by the end of 2021.

Forecasts remain impossible

Huefner expects the first opening steps in March.

"From the second quarter we will see far-reaching easing of the corona measures if everything goes according to plan." There is also reason for optimism for Krämer: "The experience of how quickly the economy recovers when the restrictions are lifted gives hope. If the bulging order books of industrial companies can also be processed, this would pave the way for a strong upswing.

Such a “rebound effect” could allow the economy to grow by 1.9 percent in the second quarter, Huefner expects.

In the summer and autumn quarters, growth will probably drop to rates of 0.7 and 0.6 percent, which are still above average.

For the year as a whole, he forecasts an increase of 4.2 percent, similar to the EU Commission, which had predicted 4.3 percent in its autumn forecast.

Commerzbank economist Krämer expects growth of 3.5 percent.

Nevertheless, risks for the upswing remain.

Not only the course of the pandemic is uncertain.

The turnaround in supply bottlenecks is also not certain, warns Krämer.

In view of the spread of the omicron variant in Asia, new setbacks threatened.

A first warning signal comes from the Trade Indicator of the Kiel Institute for the World Economy.

The data for China show another decline in exports in January.

It is becoming apparent “that the omicron outbreak in China and the attempts to contain it through hard lockdowns and plant closures in the spring are likely to have negative consequences for Europe,” explains Vincent Stamer, Head of Kiel Trade Indicator.

This is also supported by the fact that the amount of goods stuck on container ships has recently increased again.

Labor shortages are a concern

In January, inflation in the euro area rose to 5.1 percent compared to the same month last year.

The drivers of the price increase were above all the high energy prices.

This puts a strain on the purchasing power of private households and thus on the economy.

UBS economist Hüfner expects that the recovery in consumption in the spring, when restrictions are lifted, will not stall it.

Energy prices are a risk, but there are factors that mitigate the effect.

The governments of many countries have tried to cushion the burden on households - through checks, as in France, or by abolishing the EEG surcharge, which is being discussed in Germany.

In addition, the savings rate is above the pre-crisis level.

"Due to the pandemic, private households saved an amount that corresponds to 7 percent of GDP in the euro area," explains Hüfner.

Money,

The unemployment rate fell to 7 percent in the euro area in December.

This is lower than before the pandemic broke out and has reached its lowest level since the euro was introduced in 1999.

"Although companies are still using short-time work, at the same time the number of vacancies is higher than before the crisis," says Hüfner.

In addition, vacancies are difficult to fill.

In particular, countries with low unemployment rates such as Germany and the Netherlands are confronted with labor shortages.

“In the sectors most affected by the closures, retail and hospitality, workers have migrated to other sectors,” warns Carsten Brzeski, chief economist at ING Bank.

The labor shortage here could hinder the upswing after the full reopening.