The spreading of COVID-19 and subsequent euro area wide lockdowns have put the euro area economy in a weak position. We expect activity to be worse in January and February, before an improvement across the continent as the rollout of vaccines spreads and weather conditions improve, with the improvement set to accelerate further after Easter. Unsurprisingly, the euro area economy lost further momentum in December, with services activities continuing to be the main drag on the economy. Country-level PMIs, notably in Italy and the rest of the southern Europe, show the economy is currently a twospeed economy. Manufacturing momentum is keeping industry-heavy economies in expansionary territory but overall this is not enough to keep the entire eurozone growing. We expect lockdowns well into February/March. The European Medical Agency has approved two vaccines for emergency use (and plans to discuss a third from AstraZeneca in late January) but the vaccination process has got off to a slow start in some euro area countries, such as the Netherlands and France. We believe this will take its toll on those jurisdictions. However, in our view, the euro area outlook on the vaccine rollout and the improvement in the weather conditions from spring should allow for a gradual rollback of some of the lockdowns. Most recently, German Chancellor Angela Merkel indicated another 10 weeks of lockdown (from mid-January) might be in scope. 

Looking ahead, economic survey indicators on the economic outlook are becoming more optimistic, with services at pre-COVID-19 pandemic levels and manufacturing expectations at a multi-year high (see chart on the right). 

The EU's flagship response to the COVID-19 crisis, namely the Recovery and Resilience facility, was approved at the December 2020 EU Council summit and has now entered the implementation phase. After hitting an obstacle in the final phase, with Hungary and Poland threatening to veto the package, we expect the fiscal stimulus to be very sizeable, to the tune of 6.4% of GDP (budget deficit). 

At the ECB meeting in December, the ECB decided to recalibrate its monetary policy instruments but not ease its current stance. The two main measures were (1) an extending/expanding of the pandemic emergency purchase programme (PEPP) by another EUR500bn to a total package of EUR1,850bn until March 2022 and (2) another three liquidity operations (TLTRO) with an extension of the 50bp TLTRO rate discount until June 2022, subject to lending performance (so that liquidity can be taken at -1%).

December's Euro area flash inflation saw the headline figure stuck at -0.3% (fifth consecutive reading in negative territory). Energy continues to remain a drag and core inflation printed at only 0.2%. The core inflation print masks heterogeneous dynamics between goods and services prices. Despite the lockdown, service price inflation rebounded slightly to 0.7% (from 0.6% in November). The market-based inflation expectation in the euro area has risen to 1.35%, driven by a spillover effect from the US. However, in our view, we need realised data-driven confirmation before we expect inflation expectations to take another leg higher.

Danske euro area growth tracker

Our growth tracker continued its recovery in December to a value of 0.2, helped by improvements in both financial and economic variables. While this may underline that the rising number of COVID-19 cases and new lockdowns still point to pickup in activity,the uncertainty remains high, notably from the services sector. Financial markets in aggregate continue to shrug off the virus risks and focus on the outlook for 2021.

Download The Full Macro Monitor

This publication has been prepared by Danske Bank for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Bank's research analysts are not permitted to invest in securities under coverage in their research sector.
This publication is not intended for private customers in the UK or any person in the US. Danske Bank A/S is regulated by the FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange.
Copyright () Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.

Analysis feed

FXStreet Trading Signals now available!

Access to real-time signals, community and guidance now!

Latest Analysis

Latest Forex Analysis

Editors’ Picks

EUR/USD rises above 1.21 amid better market mood

EUR/USD has been extending its gains, recapturing 1.21 as the market mood improves. The German ZEW Economic Sentiment beat estimates with 61.8 points. Treasury Secretary nominee Janet Yellen's testimony is awaited.


GBP/USD clings to 1.36 ahead of Yellen's testimony

GBP/USD is edging above 1.36 as markets eagerly Treasury Secretary nominee Janet Yellen's testimony. The UK parliament is set to process the Brexit deal as Britain ramps up its vaccination campaign.


Gold recovers further from multi-week lows, climbs to $1845 region

Gold gained positive traction for the second consecutive session on Tuesday. A modest USD pullback was seen as a key factor that benefitted the metal. The risk-on mood, rallying US bond yields might cap gains for the commodity.

Gold news

Breaking: Ethereum explodes to new yearly high, validating upward price action

Ethereum has ascended to new yearly highs after breaking the recent peak achieved in January. The flagship altcoin is trading at $1,372 amid the push for gains eyeing $1,400. 

Read more

US Dollar Index: Downside pressure alleviated above 91.00

DXY met sellers in the 91.00 neighbourhood on Monday and now retreats to the 90.50 region on turnaround Tuesday.

US Dollar Index News

Forex Majors