Eurozone Outlook – Recovery but no reflation

by: Aline Schuiling

  • The COVID-19 health crisis will continue to dominate the eurozone economy in 2021
  • Lockdown and social distancing measures during the second wave of the pandemic will push the economy in another recession in the final quarter of 2020 and first quarter of 2021
  • We expect a strong upswing in the second half of 2021, when lockdown measures are expected to be lifted and economic growth will bounce back
  • Nevertheless – unlike in the US – the boost from fiscal policy will be moderate over the next two years and spare capacity and labour market slack will remain large
  • Against this background, underlying inflationary forces are expected to be subdued for a considerable time …
  • … nevertheless inflation will temporarily jump higher in 2021 on the back of several one-off factors
  • Monetary policy is expected to stay accommodative throughout 2021 and core government bond yields should remain anchored close to the deposit rate
  • Government debt will rise to unprecedentedly high levels, but the governments’ interest payment capacity will remain healthy
210210-Eurozone-Outlook-2021.pdf (323 KB)