Due to growing supply chain bottlenecks caused by Covid-19, the expansion of world economic activity has shown a clear weakness, and economic recovery dragged by the relaxation of covid controls in various countries halted. Economic growth still be a task of primary importance in European market under the shadow of the pandemic. Hence, what does the euro-zone economy head to at this point and what will it do to the euro?

The global economy: an uneven growth and a slowdown recovery

Traumatized by pandemic and supply chain bottlenecks, world economy is developing unevenly, with the pace of recovery in developed countries significantly higher than in developing countries, while supply chain bottlenecks remain an urgent worldwide problem to be solved.

The global composite output Purchasing Managers’ Index (PMI) – excluding the euro area –confirmed that growth momentum moderated in the third quarter of 2021, although it remained well above its historical average. Specifically, industrial production momentum continued to soften in advanced economies in July. Growth momentum in emerging market economies remained softer than in advanced economies, especially in the manufacturing sector. 

At the same time, new data from the World Trade Organization (WTO) point to a steady increase in commercial services trade in the second quarter, although it remains 20 percentage points below its pre-pandemic level. Most governments have eased covid restrictions, while later an uncertain growth on trade and a restrained economy occur, which may be blamed for the supply crisis and rising energy prices.

Economic activities present an increasing recovery

Benefit from the exit of covid controls by European governments and spurring by higher vaccination rates, the EU has seen a strong rebound on the service, such as tourism, as evidenced by a 2.1% of quarterly GDP growth in Q2 and a recovery trend in Q3. However, European GDP growth remains below pre-pandemic levels, when manufacturing production continues to be constrained by the shortage of materials, equipment, labour and rising transportation costs and energy prices.

According to the most recent monthly data from the European Central Bank, euro-area GDP continued to be strong in the third quarter but gradually trended downward from the fourth quarter. Industrial production fell by 1.6%. The more timely composite output Purchasing Managers’ Index (PMI) rose to 58.4 in Q3 of 2021, up from 56.8 in Q2, reflecting falling manufacturing output (to 58.6) and rising activity in services (to 58.4). However, in October the PMI declined further, reaching 54.3, suggesting Manufacturing supply bottlenecks intensified and stocks of purchases reached a record high level.

Inflation and labour market indicators

Eurostat's report released in September showed that annual HICP inflation in the euro area rose further to 3.4% in September, up from 3.0% in August, and well above the ECB's stated inflation target. The euro-area inflation is expected to rise further by the end of this year. The inflation spike is mainly affected by three factors: one, the reopening of the euro area economies so that the strong will to recover, demand is stronger than supply leading to higher commodity prices. Second, energy prices rose sharply, accounting for about half of the overall inflation in September. In particular, crude oil prices rose, with OPEC failing to meet its targets in August and September and supply weakening. Third, the base effect associated with the end of the German VAT cut is still pushing up inflation. Based on the combination of the above three factors, inflation in the euro area will remain high.

The unemployment rate in the euro area declined in August, still supported by job retention schemes. The rate stood at 7.5% in August, 0.1 percentage points lower than in July and around 0.1 percentage points higher than before the pandemic in February 2020. The number of workers in job retention schemes is declining and represented around 2% of the labour force in August. Employment increased by 0.7% in the second quarter of 2021 and total hours worked increased by 2.3% in the second quarter. However, total hours worked in the second quarter of 2021 remained below the level recorded in the fourth quarter of 2019. Similarly, labour force participation in the second quarter of 2021 was still lower than pre-crisis levels by around 1.4 million people. It suggests that the employment status in the euro area is still not optimistic and will hardly improve in the short term.

Overall, economic outlook for euro area has brightened over the past months but it is mainly relying on the government's easing of control over the epidemic. Nevertheless, the pandemic in the EU remains very serious, perhaps the short-term recovery of the economy is only the "Prague Spring" and it is not sustainable, coupled with the fact that supply chain bottlenecks have still not been effectively addressed. In the long run, it will inevitably continue to drag down European economy. Meanwhile, the euro presents a clear depreciated trend since the end of May; the support level below is weaker, and the overall is in a downward trend.