EU recovery plan coming – Also to financial markets
|The European Commission's recently published spring economic forecasts showed a better assessment of economic activity this year and next than at the beginning of the year. The forecast was raised to 4.3% for 2021 and to4.4% for 2022. In the winter, growth of 3.8% had been forecast for both years. A major reason for the upward revision was the prospect of the impact of the European Recovery Plan (Next Generation EU).
Indeed, implementation has picked up speed. The Commission has until the end of June to evaluate the countries' submitted reconstruction and resilience plans. After that, the Council has another four weeks to approve the plans. The European Recovery Plan has total volume of EUR 750bn (price-indexed), of which EUR 390bn is financial aid and EUR 360bn is loans. Not all the conditions are yet in place, aseight member states still have to ratify the Own Resources Decision, which governs the financing of the recovery plan, but this seems to be only a formality.
Once these legal foundations are in place, the European Commission will start issuing bonds to finance Next Generation EU, which could be as early as June. Over 5.5 years (until 2026), issuance volume of EUR 800bn is expected. The average issuance volume will thus be around EUR 150bn per year. For comparison: Germany issued EUR 12bn net in 2019, and France issued EUR 65bn (we use 2019, as the crisis year 2020 is of little significance). During the early years, however, it will probably be more, as the EU wants to implement and finance the majority of the projects by 2024. Ultimately, however, it will depend on how much funding is called up by the member states. However, the EU should become one of the largest, probably even the largest, issuer in the Euro bond market. During the coming years, the outstanding volume will approach that of German Bunds. Thus, the yield premium that is currently paid over German Bunds should slowly disappear, as there are hardly any differences in credit ratings. All major rating agencies, with the exception of S&P, give EU issues the highest credit rating, while Germany has the best rating with all rating agencies. The EU will offer a wide range of maturities in its future issues and thus form its own yield curve. In our view, the first issues should still bring a slight yield premium, as is currently the case with the bonds already issued by the EU to finance the SURE program (support for labor policy measures in the member states). However, as the liquidity of EU bonds increases, this yield premium should disappear.
EZ: Service providers on the rise?
Already in April, the mood of service providers brightened slightly from a level dampened by the restrictive measures. The mood in industry also improved slightly in April, despite historical records. Industry is currently benefiting, among other things, from the fact that in many Eurozone countries the entire leisure and culture sector had to be largely shut down for six months. This temporarily created disposable income for many households, which was partly spent on additional consumption of consumer durables (e.g. furniture, cars, electronics). With the gradual and sustained opening of the services sector in the coming weeks, demand for consumer durables is likely to decline again, which should also lead to a normalization of the industrial order situation.
In view of the rapid vaccination progress and opening steps already taken in some Eurozone countries (e.g. Spain), we expect a significant rise in services sentiment in May (published on May 21). In contrast, we expect sentiment in the industry to flatten out or fall slightly from the historical highs in April. Meanwhile, around 30% of citizens (with a focus particularly on vulnerable groups) in the Eurozone have received at least one vaccination dose. Thanks to the continued rapid pace of vaccination, theexpected opening steps in the services sector during the coming weeks should be sustainable and not trigger a new wave of infection. We, therefore, expect a dynamic recovery of the Eurozone economy from 2Q onwards, which should be driven primarily by the opening of the services sector.
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