Eurozone -Challenges on the path to recovery

By Dr. Alexander Boersch, Deloitte

The Eurozone economy grew rapidly in the second quarter, but supply chain shortages and inflation could stymie future growth.

The Eurozone saw an acceleration in economic growth in the second quarter, driven by private consumption. However, business activity grew at a markedly reduced rate in September. This partly reflects the peaking of demand in the second quarter, but also indicates supply chain bottlenecks. The latter, along with rising inflation, challenged the pace of economic recovery in the region.

Growth is mainly consumer-driven

In the second quarter of 2021, seasonally adjusted GDP in the euro area increased by 2.2% compared to the previous quarter, suggesting that the Eurozone continues its solid recovery from last year’s deep recession. The key driver of the recovery has been private consumption. This indicates two factors: First, there is strong pent-up demand for goods and services that have been inaccessible during the lockdowns. Second, households in the Eurozone collectively accumulated around 480 billion euros of excess savings according to Deloitte estimates, a consequence of the stable labor markets during the crisis and constrained consumption possibilities. Of course, consumers will not spend these enormous savings at once, but disburse them gradually, supporting private consumption in the medium term. Consumer sentiment in the Eurozone reached positive territory after the end of the lockdowns in the second quarter and peaked over summer (figure 1). Moreover, consumer sentiment appears to be well-supported by labor market developments. In September, the unemployment rate continued to decline to 7.5% from a peak of 8.6% in August 2020. Rising vacancy rates suggest that this trend will continue.