Eurozone Outlook – Recovery but no reflation

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