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Economists fear Europe’s recovery could be derailed by one key issue

European consumers are proving more reluctant to spend money this summer, and it could hurt the economic recovery following the shock from Covid-19, experts told CNBC.

“Because [the pandemic] has been going on for 18 months or so, we have got used to working from home and [are] more cautious about spending,” Marchel Alexandrovich, European economist at investment bank Jefferies, told CNBC on Monday.

Consumers are particularly skeptical about attending crowded events, according to Paul O’Connor, head of the U.K.-based multi-asset team at Janus Henderson.

Speaking to CNBC on Monday, O’Connor said there had been a “steady improvement” in some economic indicators, such as the number of people using public transport, going shopping and even attending the gym. “But there are some areas where we see continued consumer caution,” he added.

A survey published in July by Ipsos Moris showed that 40% of U.K. consumers were not yet comfortable taking vacations abroad. Over 40% of respondents also said they were not comfortable going to large public gatherings such as sports or music events.

In addition, “the return to work has been very hesitant,” O’Connor said, despite the relaxation of Covid restrictions in the U.K. and elsewhere in Europe. This is impacting “the economy around the office,” such as coffee shops, he added, as people opt for a hybrid working model, spending most of their time at home.

The root causes
This consumer behavior is being influenced by both government legislation and the evolution of the pandemic.

Alexandrovich gave the example of some “hesitant” consumers who are not leaving their house before they go on holiday to avoid being in contact with someone who has the virus.

In the U.K., for instance, if you are in contact with someone who tests positive for the coronavirus in the following days, you must self-isolate for 10 days — even if you’re fully vaccinated (at least for now).

Meanwhile, the highly transmissible Delta Covid variant has led to a surge in infections in recent weeks.

“The evidence from the U.K. suggests that the surge in cases is hampering economic activity as people refrain from taking full advantage of reopening,” economists at Pantheon Macroeconomics said in a note in July.

As a result, this economic consultancy slightly lowered its expectations for U.K. growth in the third quarter. “We suspect forecasters will soon have to contemplate the same in Europe, especially those coming into the third quarter with a baseline that (euro zone) GDP will leap by 3%,” they wrote.

Data released Friday showed that the euro zone grew by 2% in the second quarter of this year, recovering after two consecutive quarters in negative territory.

Though many economists are bullish on the euro zone economy in the coming quarters, they describe it as a “cautious optimism”.

“The surging ‘delta’ variant of SARS-CoV-2 infections across Europe during June and July raised the risk that the ongoing lifting of restrictions could be delayed significantly, ” analysts at Berenberg said in a note last week, although they did note that the number of new infections seems to be cresting in the 19-member bloc.

Bert Colijn, senior economist at ING, also said in a note last week that “looking ahead at [the third quarter], we would note that the Delta variant is causing some delays in the easing of restrictions and that supply chain problems continue to weigh on manufacturing production.” However, he is still expecting GDP to grow by 2% next quarter.

Momentum could be hit by other factors too.

“Growth in most major economies is likely to slow over the coming quarters,” Neil Shearing, group chief economist at Capital Economics, said in a note Monday.

“But the main reason is that most economies have already recouped much of their lost output,” he added, arguing that this likely be seen in the U.K. and euro area later this year.
Source: CNBC

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