So far Europe has trailed behind other regions, both economically and in its vaccination program roll-out. Nonetheless, recent forward looking indicators and an acceleration on the number of vaccine doses administered, act as encouraging signals for growth within the region.

Economically, the Eurozone services sector returned to expansionary mode, for the first time since last August. The Services Purchasing Manager Index (PMI) reading at 50.3, represents growth across the hardest hit sectors and is a positive signal for the recovery in Europe. Albeit lagging behind the Manufacturing PMI, at a record 24-year high of 63.4, the services sector surprised to the upside. The Eurozone services activity, which was expected to remain in contraction mode, recorded modest growth despite that covid-19 containment measures were tightened. The flash estimate reflects optimism for months ahead, particularly in France, as companies prepare for higher activity over the summer.

On the health front, despite that Europe is in the midst of a third wave of the pandemic, hopes for reaching herd immunity sooner than expected have been bolstered over the past weeks. Europe’s process to mass inoculation against covid-19 was characterised by vaccine procurement problems, vaccine nationalism and hesitancy, particularly for the vaccine jointly produced by AstraZeneca and Oxford University. As at end of February, only 6% of Europe’s population had received at least one vaccine dose, compared to 30% in the US and 15% in the UK. While still lagging behind, the number of administered vaccines across Europe is accelerating and the gap is slowly narrowing. Eight weeks later, Europe now records that 19% of the population has received one dose, compared to 41% in the US and 49% in the UK. Further improvement is expected, with the Commission guiding that 70% of adults will receive at least one dose by July and that herd immunity will be achieved earlier than expected.

From a policy point of view, the outlook for Europe is further supported by an accommodative European Central Bank. In last week’s monetary policy meeting, ECB President Christine Lagarde guided that there are clear signs of improvement, and indicated that the contraction in the services sectors is bottoming out. Albeit the positive underlying comments, the primary focus remains on enabling favourable financing conditions, to support the flow of credit and to counter the macro-economic impact of the pandemic. In this regard, President Lagarde maintained the stance that the Governing Council will continue with the significant higher pace of the ECB’s Pandemic Emergency Purchase Programme (PEPP), which were initiated mid-March, and emphasised that it is premature to discuss the phasing out of PEPP.

The meeting also presented an opportunity for investors to hear President Lagarde’s insight on the economic divergence between Europe and the US. The ECB is not expected to move in tandem with the US Federal Reserve, given the stronger economic recovery and inflation pick up in the US, sending the message that interest rates will remain low for longer.

Overall the positive forward looking indicators, faster vaccination rates and an accommodative European Central Bank serve as a supportive market environment for European risky assets, encouraging the view of a stronger recovery in the months ahead.


This article was written by Rachel Meilak, CFA, Equity Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd which is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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