Eurozone firmly on road to recovery


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The eurozone economy is recovering more quickly than expected from the pandemic and growing at a faster rate than the US and China, according to preliminary GDP data published this morning.

The EU’s quarter-on-quarter growth of 2 per cent for the three months to June is stronger than the US at 1.6 per cent and China at 1.3 per cent for the same period and follows a 0.3 per cent contraction in the first quarter.

The increase in consumer and business confidence, which comes after the lifting of lockdowns in May alongside an accelerating vaccination programme, should get a further boost once grants and cheap loans from the EU’s €800bn recovery plan start to flow after the summer. 

Despite the positive data, which is especially strong in Germany, France, Italy and Spain, concerns remain that the recovery could still suffer from the spread of the highly infectious Delta variant of coronavirus, which is forecast to account for 90 per cent of all new cases by next month.

As our Big Read explains, concerns also remain over supply chain bottlenecks that have pushed up prices for manufacturers. Separate figures on Friday showed eurozone inflation rose to 2.2 per cent in July, the highest level since October 2018. Inflation in Germany, the bloc’s biggest economy, stands at its highest level since 2008.

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Policymakers will also play a vital role in keeping the recovery on track.

Firstly, there are concerns that governments could cut their support for the economy too soon, risking a repeat of the 2012 debt crisis. Secondly, a fierce debate is brewing on EU budget rules. The European Commission will decide later this year how to amend the Stability and Growth Pact — currently suspended because of the pandemic — which keeps member states’ fiscal policies in check.

In an interview with the Financial Times, EU economics chief Paolo Gentiloni called for the rules to be “renewed and reviewed” to encourage investment, while maintaining stability and durable economic growth. “It is clear we cannot simply go back to normal,” Gentiloni said.

Global economy

US economic growth in the second quarter was a weaker than expected 1.6 per cent (6.5 per cent on an annualised basis), but this still means output is back at pre-pandemic levels for the first time. The Fed said it was making “progress” on inflation and employment goals and looked to be closer to making a decision on winding down its support for the economy.

The pace of UK recovery appeared to be picking up, as new data show a 560,000 fall, to 1.9m, in the number of workers receiving furlough payments in June. The IMF this week upgraded its UK growth forecast to 7 per cent for 2021, but this follows one of the largest dips in an advanced economy, with pre-pandemic levels of output not expected to return until 2022. The country’s tourism sector is set for a boost from the decision to admit fully vaccinated visitors from the US and the EU, as well as Britons opting for “staycations”.

Line chart of UK Treasury round-up of independent forecasts (%) showing forecasts for UK 2021 economic growth have become much more optimistic

Critics have said Thailand’s move to block online reports that cause “fear” — even if they were true — was an attempt at silencing debate over the government’s handling of the pandemic. The country is struggling with a record wave of new cases and delays in its vaccination programme.

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Business

International Airlines Group, which owns British Airways, Iberia, Aer Lingus and Vueling, said it aimed to fly 45 per cent of its schedule in the third quarter, as it reported first-half losses of €2bn. Rival Air France-KLM was also cautiously optimistic, as it reported second-quarter losses narrowing to €248m. The recovery plan for Australia’s Qantas however hit a snag after a court ruled it had broken the law when it outsourced 2,000 workers. Aircraft manufacturer Airbus doubled its profit forecast for this year in a show of confidence for commercial aviation.

NatWest swung back to a better than expected pre-tax profit of £1.6bn in the second quarter. Buoyed by the economic recovery and fewer loan defaults than anticipated, the UK bank said it would return £3bn to investors. Rival Lloyds also cut provisions for loan losses and lifted full-year targets, as it reported a pre-tax profit of £2bn after losing £676m in the same quarter last year.

Amazon said growth in its online retail business was slowing following the easing of coronavirus restrictions, although its cloud computing division AWS continued to perform strongly. Overall profit compared with last year jumped 50 per cent to $7.8bn.

Line chart of year-on-year quarterly growth by segment (%) showing Amazon's mixed growth picture

Markets

A range of factors, including a strong rebound for major economies, has sent natural gas prices in the UK and mainland Europe to some of the highest on record. Supplies of the fuel — one of the world’s most important thanks to its broad range of uses — are set to remain tight, even before peak winter demand for heating sets in.

Line chart of UK wholesale gas price, pence per therm, showing natural gas price in the UK soars to highest level since 2005

The recovery in oil prices has resulted in a bumper crop of second-quarter results for petrochemical companies. Exxon’s $4.7bn net profit was its biggest in more than six years, while Chevron also beat expectations with net earnings of $3.1bn. Shell raised its dividend nearly 40 per cent and launched a $2bn share buyback scheme, while Italy’s Eni did likewise and said its renewables business would offset any future oil price declines.

Dividends globally are set to return to pre-pandemic levels as early as this year, but in the UK payouts are not expected to recover fully until as late as 2025. Pensions, charities and retirees who rely on the income have been hit particularly hard after dividends dried up during the crisis, but analysts said companies’ moving to a more sustainable footing would bode well for the future.

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The essentials

Many Londoners have considered moving further out now that they don’t need to commute into the city every working day. However, deserters need to think carefully about the negative effect this could have on their finances, writes consumer editor Claer Barrett.

Have your say

Calamity comments on Could hybrid working make or break your finances?

One frustrating thing that is often overlooked is the impact on people who were already living rurally pre-pandemic. I work outside London and already had an hour-long commute so I could live in a market town and still earn a reasonable wage. It was starting to look like I’d soon be able to move to a bigger house with a garden, which was my plan all along (yes, even pre-pandemic). Now local house prices have skyrocketed and such a move looks impossible. I may have to stay in my cramped apartment for another year while I wait for the London brigade to realise that (a) “rural charm” wears off quickly unless you have a particular affinity for it, and (b) Londoners are generally despised everywhere that isn’t London. Sure, people might’ve always been nice to you when you book a holiday cottage in their seaside town, but in the dead of winter you might unfortunately discover that most of the country considers gentrification to be negative.

Final thought

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