Economic road to recovery has more than one lane
The overall picture for Europe is the most optimistic since before the pandemic – but recovery speeds will vary, and tail risks remain
- David Rea
Across Europe, conditions are improving, and the outlook is positive. The ties that bound the COVID-19 pandemic to economic activity have been weakened. But tail risks still exist, and the recovery will continue to be multi-speed.
A renewed winter wave of infections could tip policymakers into a reactive response and the tightening of restrictions.
At the same time, supply chain bottlenecks and labour shortages are accelerating cost increases and deepening shortages. Already the construction sector, the automotive industry, and many consumer product categories are feeling the pinch, with empty spaces on shelves and factory lines, as well as panic buying in places. While shortages and prices pressures will dissipate as conditions improve, we should not be blind to the tail risk of the reverse.
The pace of recovery will differ, sometimes markedly, across countries, sectors, and other parameters. Countries are at different stages of their vaccination programmes and have taken contrasting approaches to COVID-19 restrictions and stimulus measures.
GDP growth rates are least volatile for those countries with the most generous, longest lasting, and consistent fiscal support policies. And growth is highest for those with the furthest to recover – meaning we should not judge 2021 rates of growth without reference to the contractions seen in 2020.
For equities, consumer goods and technology are performing much better than the aggregate, while sectors exposed to international travel remain around 30 percent down on pre-crisis levels.
Within countries, towns and large cities are recovering differently. Commuters have returned wholeheartedly to Manchester, for instance, and to other smaller cities and medium-to-large towns. Mega-cities, however, such as London and Paris are further behind. Many factors are at play here, including reliance on public transport versus personal cars, commuting times, and the degree to which work can be conducted from home. The result is different rates of recovery across urban conurbations.
Positively, what economic actors are saying, and what they are doing, are aligned. The rebound in confidence is being met with a return towards normality across various behavioural patterns: Consumers are engaging in retail and recreational activity at levels seen before the pandemic; commuting patterns are on a quickly recovering trend; and workplace occupation is picking up.
What’s becoming increasingly clear is how the road to recovery has more than one lane, and all drivers must keep an eye out for obstacles in the road ahead.