The European Central Bank (ECB) now predicts a decent boost in economic activity for Quarter 2. What’s driving growth in Europe? Guy Thornewill, Pie's Head of Research UK & Europe and Senior Investment Analyst, based between London and France, explains.
What’s driving the growth in Europe?
The mass vaccination programme in Europe has finally started picking up speed in recent weeks after a slow start. This is leading to increasing economic activity and higher consumer confidence. Indeed the European Central Bank (ECB) is now projecting a “sizeable improvement in activity in Q2”. Of course, the year-on-year growth rate will look high because it is compared to the second quarter of 2020 which was hugely impacted by lockdowns. But the recent progress is certainly encouraging and is what we have been expecting. For 2021 as a whole, assuming vaccine progress continues to be successful, the ECB now expects GDP growth in the Eurozone to be 4.6%, so a strong rebound. In the UK, projections are now for as much as 6% GDP growth for 2021, but the UK suffered a worse economic outcome last year.
What does this mean for European markets?
Strong economic growth is typically good for corporate earnings and therefore positive for European share markets. Investors have taken notice, and European markets are up about 15% so far in 2021. While this does mean that some of the good news is now reflected in share prices, we expect corporate earnings will continue to show a strong recovery, and the ECB has committed to keeping its monetary policy quite loose for the time being. This means interest rates won’t be moving higher just yet, which is again positive for share markets.
Pie’s UK & Europe Fund has kept pace with the markets in 2021, after handily outperforming them in 2020. We are growth investors, and this means that some of the more cyclical sectors of the economy, which have performed well in 2021 as economies re-open, are not typically where we would invest. However, given our stock-picking style we have still been able to find some good winners this year. We’ve also tilted the fund towards some more cyclical areas or recovery stocks, such as our investments in some UK housing-related companies, an Italian industrial tool manufacturer, and a UK pub company.
Is there more optimism?
Europeans are now starting to travel much more, and there are signs that the summer period in Europe could still be quite busy. The EU has announced it will introduce a digital Covid certificate from 1 July 2021, which will allow vaccinated members of the EU to travel freely within the EU. This gives consumers the confidence to make holiday bookings, and we are already hearing stories about shortages of rental cars in certain popular holiday destinations like the South of France.
Unfortunately the UK seems reluctant to go down this path, and is soon likely to further delay any easing of restrictions due to a small rise in cases recently. The government also just put Portugal back on its “amber list” for travel, having only added it to the “green list” three weeks earlier. This caused chaos and huge expense for thousands of travellers, who had to rush home with just a few days’ notice to avoid a 10-day quarantine period. In this respect, even though the UK is still further advanced in its vaccine roll-out than its neighbours across the channel, its cautious outlook on travel risks leaving it further isolated and without tourists for another summer.
Meanwhile in France, restaurants and bars are now fully open and the curfew has been changed to 11pm from 6pm. Vaccinations are going quite well now even if a significant number of French people are still refusing to get vaccinated due to safety concerns, or simply because they don’t like being told what to do by the government. According to government sources though, there will be no return to restrictions this summer, but that remains to be seen! However, the mood is certainly much more optimistic than even a month ago.
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