The slow vaccination programme has left the euro-zone well behind the US and UK incoming out of the health crisis. We think the economy will not expand at all in Q2 and GDP growth will be much weaker than the consensus expects this year. Nonetheless, on the assumption that half of the adult population has a first vaccine by around July, restrictions should then be lifted, triggering a sustained rebound. We think Germany will regain its pre-pandemic level of GDP early next year but the southern economies not until much later. Meanwhile, after rising this year, headline inflation is likely to drop back sharply next year as underlying price pressures and wage inflation remain very subdued. We also think the ECB will leave its deposit rate unchanged well beyond 2023, when the Fed will start tightening, and2024, when the market has priced in rate hikes in the euro-zone. The Bank will also continue with net asset purchases under the PEPP throughout 2022.
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