Economic activity in the euro zone is expected to return to its pre-crisis level in the first quarter of 2022, but there is "still a long way to go" before the economic damage inflicted by the pandemic is offset, according to the European Central Bank (ECB).
In its latest monthly bulletin, the ECB said there were still 3.3 million fewer people employed than before the onset of the Covid-19 crisis, with younger and lower-skilled workers affected most.
The number of workers in job retention schemes is declining but “remains elevated”, at around 5 per cent of the labour force in May.
The euro zone economy is “on track for strong growth” in the third quarter of 2021 after rebounding in the second quarter as restrictions eased and governments accelerated their vaccination programmes.
Manufacturing is “expected to perform strongly”, although supply bottlenecks are holding back production in the near term, while the Delta variant could dampen the “vigorous bounce-back” in the services sector, especially in tourism and hospitality.
There is also “still some way to go” before the fallout from the pandemic on inflation is eliminated, the ECB added. Inflation is expected to rise over the medium term, yet remain below its 2 per cent target.
Consumer spending
Overall, the ECB’s governing council sees risks to the outlook as “broadly balanced”, with the possibility that economic activity could outperform its expectations if consumers spend more than currently expected and draw more rapidly on the savings they have built up during the pandemic.
“A faster improvement in the pandemic situation could also lead to a stronger expansion than currently envisaged. But growth could underperform expectations if the pandemic intensifies or if supply shortages turn out to be more persistent and hold back production.”
The ECB also noted that growth momentum in the global economy had slowed somewhat in June despite robust trade in goods, while price pressures have increased further.
“Looking ahead, pandemic developments continue to be a source of uncertainty for the global economic recovery and may lead to an increasingly uneven growth path across countries.”
