European Union Recovery
The Europe Union (EU) and its governing body, the European Commission have faced heavy criticism for a slow coronavirus vaccine roll-out with less than 10% of the total population receiving at least one dose compared to close to 50% in the UK, but it does marginally better at administering the second dose. Adding to their COVID problems is the start of a third wave, vaccine supply issues, and deteriorating public trust in one of the major vaccines in addition to vaccine-hesitancy plaguing one of their major industries (tourism). At the current rates of vaccination, EU may miss its target of 70% of its population vaccinated by September. However, some relief is expected by the way of a more diversified supply of vaccines expected in Q2. Given that the EU Economic Summit is currently ongoing, now is an interesting time to look at the European Union as part of our series on the recovery of various countries/regions.
Case Numbers and Lockdowns Imposed
As of the 23rd of March, 11 countries in the EU have re-entered or extended their current partial lockdowns. The 27-country bloc already faced problems with vaccine supply disruptions and a temporary halt on one of the main vaccines being used has seen a steady rise in infections as lockdown restrictions were eased. Not helping matters has been the arrival of a new strain, dubbed the UK strain from when it was discovered late 2020 in the UK, which is thought to be more contagious and deadly in comparison to the original strain.
As of the 22nd of March, Germany reported an infection rate of 107 per 100,000, thrice as high as it was three weeks ago and surpassing the 100 per 100k emergency-brake threshold which triggered the previous partial lockdown; 70% of these new infections are attributable to the UK strain. As of the 23rd of March, Germany has a 7-day rolling average of 13, 738 cases with a peak of 14,196 on the 20th of March 2021; prompting the German Chancellor Angela Merkel to declare an extension to the previous lockdown through Easter until the 18th of April 2021 with a much stricter 5-day lockdown (though this was cancelled as of the 25th of March). This lockdown imposes restrictions on non-essential travel and stores, bans public gatherings and limits private gatherings to a maximum of 5 persons from one other household.
Effective from the 22nd of March, Italy has upgraded all regions to either high risk or medium risk zones, both of which impose significant restrictions on movement. The national average infection rate is 264 per 100k residents with a 7-day rolling average as of the 25th of March of 22,978. In addition to the lockdown extension, Italy has imposed a nation-wide total lockdown (all regions will be declared as high-risk zones) over the Easter weekend. Italy reports more than 50% of new infections are due to the UK variant, with small clusters of the Brazil variant, which is even more contagious and fatal amongst young people.
On the 19th of March, the French Prime Minister Jean Castex imposed a new month-long partial lockdown on 21 million people in 16 affected areas including Paris, Nice and the northern regions of France. On the 21st of March, the country reported a national incidence rate of 307.8 per 100k residents and its highest number of new cases at 35,000 with a rising current 7-day rolling average of 31,500, the highest number of new cases since the acceleration of the 2nd wave in November. However, new restrictions are expected to be a lite version of the previous lockdown, which itself was a lite version of the first lockdown. All non-essential businesses will remain shut, while schools will remain open, and people will be allowed outside for exercise.
Poland imposed its nation-wide partial lockdown on the 20th of March until the 9th of April, as Polish health officials reported a spike of 27,274 new cases, the highest since November 2020 with a rising 7-day average of 22,564 as of the 23rd of March. The current infection rate in Poland is 200 per 100k residents. Of these new cases, 60% are attributable to the new UK variant. The lockdown will see recently reopened hotels, cultural and sports public gatherings banned with the youngest 3 years of schooling to return to remote learning. Poland has also been declared high risk by neighbours like Germany and limits on cross-border travel have been imposed.
Vaccination Rates – Dose 1 and 2; Priority Groups
According to the Bloomberg Vaccine Tracker, the EU currently administers 1.1m doses per day on average with only 6.7% of its population vaccinated with the first dose. This is in contrast to the UK which has vaccinated almost half of its population; however, it must be noted that the UK has primarily focused on administering only the first dose to as many people as possible with a 12-week interval between doses. Meanwhile, the EU has begun administering the second dose with all states leading the UK’s rate of having 3.5% of its population fully vaccinated. Given its current vaccination rate, the EU will take another 17 months to vaccinate 75% of its population, a long way from its target of vaccinating that many by September 2021.
Mrs Merkel is banking on a mass vaccination drive in April and May with a dramatic rise in vaccinations from its current rate of 1.4m a week. So far Germany has administered 11.5 million doses with only 9.5% of its population having received at least one jab so far.
President Macron confirms that 35 new ‘mega centre-vaccinodromes’ will open across the country by April, ramping up the vaccination rate to 2 million per day from its current average of 195,848 doses per day. France will be vaccinating the current priority group of everyone over 70 from the 27th of March and has administered 8.8 million doses so far.
The new Italian Prime Minister, Mario Draghi, has released plans to accelerate the rollout, with an aim of 56 million doses to be administered by June, which means that it needs to significantly increase its current rollout rate of 168k vaccines a day. The government has planned to increase vaccinations to 200,000 in March and increase in increments of 100,000 each month to reach its June goal. To facilitate this acceleration, the government plans to increase the number of vaccination sites to 2,000 by April. So far 8.2 million doses have been administered of which 2.6 million are second vaccination doses.
Unlike its neighbours, Poland’s vaccination strategy relies solely on deliveries negotiated with producers through the European Commission and suffers from ‘vaccine hesitancy’ with originally only 65% of Poles intending to vaccinate up from 38% in December 2020. So far, 8.9% of its population have been administered with at least one dose with 83,987 doses administered daily and 5.2 million doses administered in total, with first doses going out to priority groups of anyone age over 70 and health care workers. The Polish government expects to administer 3.5-4 million doses monthly if supplies are available.
Currently Approved Vaccines
- Johnson & Johnson
Vaccines still in Development
Vaccines in Exploratory Talks
Vaccine Trade between the UK and EU; AstraZeneca’s Image Problem
The vaccine trade spat between the UK and the 27-country bloc deepens with the EU bitterly complaining about the fact that U.K. manufacturers are not shipping vaccine doses abroad, while the EU has so far shipped at least 40 million doses to 33 countries, including the UK. A trade dispute started in late January with the AstraZeneca vaccine at its centre, when the EU imposed what’s officially called an ‘export authorization scheme’, which blocks exports unless they receive a thumbs-up from all of the national governments in the EU. This blocks pharmaceutical companies that have dishonoured contractual obligations to the EU, or which are prioritizing non-vulnerable countries ahead of the EU. Originally set to expire at the end of March, EU leaders have agreed to extend export controls until the end of June. It was first invoked earlier this month when Italy banned a shipment of 250,000 AstraZeneca doses to Australia. Such a move by the EU may trigger retaliatory action give the global nature of vaccine supply lines; the UK supplies many of the raw materials needed for the Pfizer vaccine production in the EU, while one of the UK-favoured AstraZeneca vaccine manufacturing plants is located in the EU.
Last week, 13 European governments decided to suspend the use of AstraZeneca vaccines over what turned out to be incorrect fears about blood clots. Since then, the European Medical Agency has conducted a safety review into the jab and found that the jab is ‘not associated’ with a higher risk of clots. The 13 countries have said that they would resume using the vaccines, though the public trust in the jab remains low. A YouGov poll conducted in the EU, found that more than half of the 7,000 respondents, believed the AstraZeneca vaccine to be unsafe. With the third wave of infections quickly reaching its peak, this diminished confidence could end up damaging the already slow roll out.
On the positive side, the EU expects a substantial increase in vaccine deliveries in the coming months with a significant increase from Pfizer at 200 million doses and the newcomer J&J supplying nearly as much as AstraZeneca at just over 50 million; this should help ramp-up the recovery amid new flare-ups.
Monetary and Fiscal Policy Summary and Outlook
So far, governments of the various EU states have announced a large number of fiscal measures since the pandemic began; broadly categorized as automatic stabilisers and discretionary measures. Automatic stabilizers are measures such as adjusting tax rates and transfer payments to provide stability to affected households and workers. Discretionary measures can be further categorised as budgetary measures and liquidity measures. The table below separates these measures into the expenditure side and revenue side based on the purpose of stimulus.
Source: ECB website
Source: ECB website
Looking-forward, the €750bn NextGenerationEU recovery plan will also provide important support for the recovery of the European economy and represents an addition to the national fiscal responses of member states from 2021 to 2026. However, the success of this recovery plan critically depends upon coordination amongst member states and medium-term fiscal policies being designed in a way that ensures public debt sustainability.
In terms of monetary policy, the European Central Bank (ECB) initiated a pandemic-emergency purchase program, which is a hybrid between traditional quantitative easing (targeting asset purchases to inject new money into the system) and yield curve control (YCC), which targets bond yields. However, this hybrid method makes bond markets in the eurozone more vulnerable to sell-offs than if a typical YCC policy was used. Furthermore, in their last meeting, the ECB has also shortened the timeframe for guidance, further adding uncertainty to the market.
Given the recent inflation fears as the economy recovers, pent-up demand and higher savings will lead to a spike in global consumption and the eurozone, despite its grim short-term outlook, has seen its bond yields rise parallelly to the spikes in US bond yields, decoupling it from that is happening in the eurozone economy. In response, the ECB has vowed to step up the pace of its bond purchases which currently averages €14m a week to maintain interest rates 0% and deposit rates of -0.5%. The ECB also extended it’s program by nine months to March 2022, with principals and coupons to be reinvested until at least the end of 2023.
Source: ECB website, Maqro Research
Benefits and Risks to the EU Equity Market
Europe’s Miraculous Multiplication of Money
In January 2021, the monetary base relative to annual economic output known as ‘debt-to-GDP ratio was 43% in the eurozone, double the 24% in the US and 3.5x the historic level once sufficient for transactional purposes. In contrast, these figures were almost identical 12% and 11% (EU and US) during the GFC in 2008. Of the total monetary base of €5tn 72% is a mere overhang of money which is not circulating in the wider economy. Given that the low-interest environment is expected to continue for some time, this is likely to support faster growth with new capital likely to have an advantage over previously committed capital. Additionally, the pandemic may have enhanced return on investments given that the management of most companies optimised their cost bases and improved asset utilization efficiencies.
With the current situation in Europe in mind, central banks are unlikely to pull back on the monetization of the economy or address their significant debt balances. Adding to the risks, however, are inflation fears and the market’s reaction to it rising; a speedy recovery will likely see inflation pick up quickly at times and may even breach the 2% level, which would prompt investors to speculate about tightening monetary policy, which would add to price inefficiencies, and thus creating opportunities for active investors. Given the easy credit environment and high public debt levels, markets will be on the look-out for widening spreads for government bonds, a signal to markets for potential bankruptcies.
Current Credit Ratings
EU remains rated AAA/Aaa/AA and a stable outlook is maintained by Fitch, Moody’s, and Standard & Poor’s.
Europe to Benefit from Growing ESG Trends
EU Recovery Fund of €750 billion of which €672.5 billion is a debt facility, which helps member-states receive support for:
- The green transition
- Digital transformation
- Smart, sustainable and inclusive of growth and jobs
- Social and territorial cohesion
- Health and resilience
- Policies for the next generation, including education and skills
EU countries have until the 30th of April 2021, to submit their national recovery and resilience plans on their reform and investment agendas. This investment will likely be supportive of both small- and mid-cap companies, while large companies in construction, infrastructure, environmental, health care, and telecoms industries may also benefit.
Despite the current struggles in Europe, going-forward, we see many upsides. Increased vaccine deliveries and new additions to vaccination sites across Europe will see more people vaccinated. However, given current movement restrictions this will likely be a balancing act between keeping infection rates low and vaccination rates high. As Europe recovers, the great rebasing is likely to benefit the market and be very stock-specific. Furthermore, ESG trends will see Europe continue lead the world in green energy as governments look to rebuild their economies with a significant focus on power generation and shift to renewables – this will likely have a compounding impact across the entire value chain.