The Euro area economy experienced a double-dip recession, as confirmed by the recent Eurostat data. The weakness may weigh on the common currency in the second quarter of the year.
The Euro area experienced a double-dip recession, as shown by the Eurostat flash estimates. The Gross Domestic Product (GDP) fell by 0.6% in the first quarter of the year, following another drop of 0.7% in the last quarter of the previous year.
However, the forward projections indicate that the economy will bounce back strongly, albeit not as strongly as the United States. The Euro area GDP projections indicate that the economy will grow by 4.3% in 2021 and 4.5% in 2022. While this is good news, the Euro area economies lag the United States, and the risk is that the gap will increase in the months ahead.
Vaccination Efforts Pick Up
One of the factors contributing to the strong economic rebound expected in the months ahead stems from the vaccination campaigns that have picked up strongly in the recent weeks. Germany, for instance, is administering one million jabs per day, while Spain and Italy follow with half a million on a daily basis.
Thanks to the efficacy demonstrated by the COVID-19 vaccines, as seen in countries like Israel, the United Kingdom and the United States, Euro area countries have increased their efforts. The larger the proportion of the population getting vaccinated, the stronger the economic rebound as normal business activities return.
The markets have already started to reflect the gap between the United States economy and the Euro area. The dollar gained against the euro in recent days, reversing from 1.2150 and trading with a weak tone ahead of the NFP report due on Friday.
In addition to the vaccination campaign that started earlier in the United States, fiscal support is another explanation for the gap between the economic performance of the two. In the United States, it came immediately in the form of checks sent directly to homes, wheras in the Euro area the bulk of the promised funds are still outstanding.
Moreover, voices inside the ECB’s Governing Council already express concerns about the loose monetary policy and the need to tackle inflation. Such concerns are not being voiced by Fed members, which is most likely also being reflected in the EUR/USD exchange rate.