Europe COVID-19 Tracker Free to View Economics - Europe

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30 June 2021

Europe COVID-19 tracker Free to View Economics - Europe

It’s not over until it’s over…

 UK infection numbers are still on the rise despite the country's Christian Fuertjes earlier vaccination successes… Economist HSBC Trinkaus & Burkhardt AG  …and at least on the Iberian Peninsula, the Delta variant seems to have found another stronghold on the continent…  …but for the moment the rest of Europe seems focused on reopening euphoria and thus faces growing inflation risks

The UK has already won an (unwanted) European title back England’s football team may be on track to achieve the number one spot in Europe, but unfortunately the UK as a whole has already managed to do the same in terms of new COVID- 19 infections (Charts 1,2). Fortunately, though, the ICU numbers in the UK so far have gone up only marginally despite the rapid spread of the Delta variant (Charts 3,4). At least in this respect the strong early successes of the UK’s vaccination campaign seem to have borne fruit. But Europe is catching up not only in vaccinations (Charts 5,6) but also in infection numbers, particularly in Portugal and Spain. It thus remains to be seen if the higher degree of mRNA-based vaccines – with the BioNTec vaccine being the backbone of the EU’s vaccination campaign so far in contrast to the vector- based Astra-Zeneca one used by the UK (Charts 7,8) – provides better protection against the Delta variant, which has already gained footing on the continent as well (Chart 9). While early studies suggested comparably higher protection by the mRNA vaccines to variants in general and to Delta in particular, these data are still inconclusive. Hence, fear of the Delta variant has already led to vastly increased travel restrictions for UK visitors to the continent. Even within the EU, Portugal has been labelled a high-risk destination for German tourists resulting in mass cancelling of holiday trips, threatening the rebound in the tourism sector.

Business and consumer confidence point to strong recovery, more inflation risks Meanwhile the rest of Europe is still enjoying the end of most COVID-19 restrictions (Charts 12- 14). Business sentiment, which was already bullish in the manufacturing sector for a while, has now vastly improved across other sectors as well, which was underlined by the latest ifo data for Germany and INSEE results from France (Charts 16,17). This chimed well with consumer confidence, which also surged in Europe’s two biggest economies in June (Charts 18,19). The latter was likely helped by the fact that purchasing power during the pandemic was largely protected by short-time work schemes. A strong German labour market report for June – which saw the unemployment rate drop below 6% even in May – as well as the latest STW data for France indicate that the demand for workers has picked up markedly (Charts 20,21). Hence, disposable incomes could see another boost in Q3, further pushing up consumption. However, the increased demand for goods and services is butting up against constrained supplies for both, which could further amplify inflation risks. Although both headline and core inflation rates fell slightly in the Eurozone in June, this was merely due to base effects (Chart 22). In fact, we expect the German HICP to reach 4% in November and the latest PPI points to additional price pressure on goods producers (Charts 23,24). Hence, for the ECB it would be a hard sell to continue their PEPP purchases at the current pace in September (Chart 25).

This is an abridged version of a report by the same title published on 30-Jun-21. Please contact your HSBC representative or email AskResearch@hsbc.com for more information.

Disclosures & Disclaimer Issuer of report: HSBC Trinkaus & Burkhardt AG This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. View HSBC Global Research at: https://www.research.hsbc.com

Free to View ● Economics - Europe 30 June 2021

First signs of the Delta variant effect detectable on the continent

1. New infection numbers in the UK are increasing exponentially again COVID-19 cases* in the eurozone big 4 and UK 160000 160000

120000 120000

80000 80000

40000 40000

0 0 Jan Mar May Jul Sep Nov Jan Mar May Jul Germany France Italy Spain UK

Source: Refinitiv Datastream, HSBC. Notes: *7-day moving average.

2. Apart from the UK, COVID-19 has also made a comeback on the Iberian Peninsula 7dma Daily COVID-19 cases per 100k of population 7dma 30 30 25 25 20 20 15 15 10 10 5 5

0 0

Italy

Spain

Ireland

France

Greece

Norway

Sweden Belgium

Portugal

Germany

Switzerland Netherlands 7-day to 22-June 7-day to 29-June Source: Refinitiv Datastream, HSBC. Note: Weekend numbers are reported as 0, so “7-days to” does not include Saturday and Sunday.

3. Luckily, ICU numbers remain low in the UK 4. The Delta variant is behind the recent and are falling elsewhere uptick in UK cases

Total COVID-19 related ICU patients Total % Proportion of different COVID-19 v ariants % in England 8000 8000 100 100

6000 6000 80 80 60 60 4000 4000 40 40

2000 2000 20 20

0 0 0 0 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Alpha: B.1.1.7 (Kent) Delta: B.1.617.2 (India) Other Germany France Italy UK* Source: Macrobond, HSBC. *Medically ventilated Source: The Spectator, Wellcome Sanger Institute, HSBC

We acknowledge the assistance of Emily Wagenmann and Yash Dewan, HSBC Bank plc, in the preparation of this report.

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Can vaccination progress outrun the Delta variant?

5. EU countries are still behind in total vaccination numbers compared to the UK…

Number Number of v accine doses administered per 100 people Number 160 160

120 120

80 80

40 40

0 0

UK (28 Jun) UK (28 Jun) US (29

Italy (29 (29 Jun) Italy

Malta (28 Jun) (28 Malta

Spain (28 Jun) (28 Spain

Ireland (20 Jun) (20 Ireland

France (28 Jun) (28 France Jun) (29 Poland

Iceland (29 Jun) (29 Iceland

Greece (29 Jun) (29 Greece Jun) (28 Finland

Norway (28 Jun) (28 Norway

Canada (29 Jun) (29 Canada

Sweden (29 Jun) (29 Sweden

Bulgaria (29 Jun) (29 Bulgaria Portugal (29 Jun) (29 Portugal Germany (29 Jun) (29 Germany Source: Our World in Data, HSBC

6. …but have been catching up steadily in 7. In the EU vaccination campaign mRNA recent weeks vaccines were predominantly used…

Per mn Daily COVID-19 v accine doses Per mn % Germany : Share of v accine producer on total shots % 12000 12000 100 100 10000 10000 80 80 8000 8000 60 60 6000 6000 40 40 4000 4000 2000 2000 20 20 0 0 0 0 Dec-20 Feb-21 Apr-21 Jun-21 Dec-20 Feb-21 Apr-21 Jun-21 Germany France Italy AstraZeneca BioNTech Spain UK US Moderna J&J Source: Our World in Data, HSBC Source: Macrobond

8. ...while the UK was relying mainly on the 9. ...which might give the EU countries an Astra Zeneca vector vaccine… edge in fighting the Delta variant threat

% Germany : COVID-19 variants % Mn UK supply of doses by vaccine type Mn 100 100 120 120 100 100 80 80 80 80 60 60 60 60

40 40 40 40 20 20 20 20 0 0 AZ/Oxford Pfizer Moderna 0 0 Adenovirus mRNA(delivered) Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21

Alpha B.1.1.7 Beta B.1.351 Delta B.1.617.2 Source: NHS Source: RKI, HSBC

3 Free to View ● Economics - Europe 30 June 2021

A substantial vaccine rollout is under way

10. In the long run, vaccine supply is not an issue for Europe ______EC ______Organisation Dose Type of vaccine Reported effectiveness* AstraZeneca/Oxford University Up to 400m Adenovirus 70.4% BioNTech/Pfizer Up to 604m + 1.8bn** mRNA 95% CureVac Up to 405m mRNA TBD GSK/Sanofi Up to 300m Protein adjuvant TBD Janssen/JNJ Up to 400m Adenovirus 66% Moderna Up to 460m mRNA 95.6% ______Germany ______Organisation Dose Type of vaccine Reported effectiveness* AstraZeneca/Oxford University 56m Adenovirus 70.4% BioNTech/Pfizer 30m + 64m from EC = 94m mRNA 95% CureVac 20m + 54m from EC mRNA - GSK/Sanofi 55m Protein adjuvant TBD Janssen/JNJ 37m Adenovirus 66% Moderna 50m mRNA 95.6% ______France ______Organisation Dose Type of vaccine Reported effectiveness* AstraZeneca/Oxford University Up to 60m from EC Adenovirus 70.4% BioNTech/Pfizer Up to 91m from EC mRNA 95% Moderna Up to 69m from EC mRNA 95.6% CureVac Up to 45m from EC mRNA TBD GSK/Sanofi Up to 24m from EC Protein adjuvant TBD Janssen/JNJ Up to 35m from EC Adenovirus 66% ______Italy ______Organisation Dose Type of vaccine Reported effectiveness* AstraZeneca/Oxford University 16m from EC Adenovirus 70.4% BioNTech/Pfizer 40.5m from EC mRNA 95% Various providers 70m - - ______Spain ______Organisation Dose Type of vaccine Reported effectiveness* AstraZeneca/Oxford University 31.5m from EC Adenovirus 70.4% BioNTech/Pfizer 20m + 94m** from EC mRNA 95% Janssen/JNJ 20m Adenovirus 66% ______UK ______Organisation Dose Type of vaccine Reported effectiveness* AstraZeneca/Oxford University 100m Adenovirus 70.4% BioNTech/Pfizer 100m mRNA 95% GSK/Sanofi 60m Protein adjuvant TBD Janssen/JNJ 30m Adenovirus 66% Moderna 17m mRNA 95.6% Novavax 60m Protein adjuvant 89% Valneva 60m Inactivated whole virus TBD Source: AstraZeneca, BioNTech, CureVac, GSK, Janssen, Moderna, Novavax, IDT Biologika, Valneva, HSBC. Note: *Maximum reported. **Between end-2021 and 2023

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Activity is in general still on an upswing

11. Activity on the continent has seen another uptick lately… % from baseline Europe and US: mobility data - retail and recreation* % from baseline 20 20 0 0 -20 -20 -40 -40 -60 -60 -80 -80 -100 -100 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Germany France Italy Spain

UK Sweden Norway US Source: Google, HSBC. Note: *7-day moving average

12. …whereas remote working still seems to be keeping workers at home % from baseline Europe and US: mobility data - workplaces* % from baseline 20 20

0 0

-20 -20

-40 -40

-60 -60

-80 -80 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Germany France Italy Spain

UK Sweden Norway US Source: Google, HSBC. Note: *7-day moving average

13. Spain’s and Portugal’s new infection 14. In the UK the post lockdown activity worries have led to some new restrictions boom abated somewhat in recent weeks

Index Eurozone: stringency of restrictions Dev iation Index UK: stringency of restrictions Dev iation and mobility * from baseline and mobility * from baseline 0 40 0 20

20 20 20 0 40 0 40 -20 60 -20 60 -40 80 -40 80

100 -60 100 -60 Feb-20 May-20 Aug-20 Nov-20 Feb-21 May-21 Feb-20 May-20 Aug-20 Nov-20 Feb-21 May-21 Stringency score (LHS, inverted) Mobility (RHS) Stringency score (LHS, inverted) Mobility (RHS) Source: Google mobility, Oxford COVID-19 Government response Tracker, HSBC. Source: Google mobility, Oxford COVID-19 Government response Tracker, HSBC Note: *Mobilty data is an average of all the components, excluding residential, 7dma Note: *Mobilty data is an average of all the components, excluding residential, 7dma

Free to View ● Economics - Europe 30 June 2021

Gearing up for a relatively restriction-free summer

15. Latest on the restrictions from the major European countries Country Latest lockdown measures Germany On 22 March, the Chancellery and the Heads of Federal States agreed upon extending the following lockdown restrictions:  Private meetings are limited to five persons (children up to 14 years are not counted) from two different households in public and private places.  When using public transport or visiting shops, surgical masks or masks of the KN95 of FFP” standards must be worn. An even stricter rule applies for employees and visitors of nursing homes, who have to wear FFP-2 masks for at least as long as there is not a sufficient protection through vaccination.  Non-essential private domestic travelling should be generally avoided (but is not prohibited). Travellers from abroad who enter Germany from a designated COVID-19 risk area need to register before entering and have to quarantine for at least 10 days or provide a negative test result after five days at the earliest.  Entering Germany from a high-risk designated area additionally requires a negative test result. On 21 April, the Bundestag amended the “Infection Protection Act”, including the so called “Emergency Break” to unify the measures to contain the spread of the virus at a national level. While these measures are similar to those set out above, they also contain some further refinements, for example:

 If the incidence level in a region exceeds 100 on three consecutive days, the additional measures specified in the law including a nightly curfew from 10:00pm to 5:00am automatically apply from the day after next. The measures came into force on 23 April and apply for as long as an epidemic emergency situation is officially declared, but until 30 June 2021 at the latest.  Regarding schools, alternating instruction is mandatory starting at an incidence level of 100. If the incidence level increases to 165 schools will have to close and remote learning will become mandatory (apart from some exceptions).  An obligation for businesses to provide remote working opportunities is now anchored in the Infection Protection Act. Employers must offer employees the option for remote working wherever possible. This regulation is now also applied regardless of the 7-day incidence level. If companies claim that remote working is not possible for certain employees, they have to proof this in case of an investigation and are also required to at least test those employees regularly (without any compensation for it by the government).  Above an incidence level of 150, retail stores (with the exception of stores for daily needs such as supermarkets) and services (eg, zoos, museums etc.) will have to close. Between 100 and 150, visiting a retail store will still be possible after booking an appointment in advance and under the precondition of presenting a negative COVID-19 test. However, as of 30 June, none of 401 districts in Germany were above the critical incidence threshold of 100 or even above 35, which means that the whole country has now reached the maximum reopening status that is possible under current restriction guidelines. This implies that almost all services including accommodation and indoor dining are accessible again though for some, hygienic restrictions or negative test results are still necessary. Moreover, on 4 May the Bundestag passed a decree that basically exempts fully vaccinated people and recovered COVID-19 patients from certain restriction measures, such as providing an obligatory test to use certain services and lifting the general contact restrictions for them as well.

France The government introduced strict additional restrictions at the start of the year, including a stricter curfew and travel restrictions. On 20 March, full-time local lockdowns were put in place in 19 departments (covering all the Paris region) for at least four weeks. The restriction measures in confined departments include the closure of non-essential shops and services, limitations of travel to within 10km from homes and a ban on interregional travel. In addition, remote working was strongly encouraged wherever possible. On 31 March, President Macron announced an extension of these rules to all metropolitan France from 3 April in the evening. All interregional travel was banned from 5 April. In addition, schools were closed for between three and four weeks, including the already planned two-week-long spring holidays. However, restrictions have started to be gradually eased. On 26 April, kindergartens and primary schools reopened. On 3 May, secondary and high schools reopened but only at half capacity for pupils aged above 13 years. All restrictions on domestic travel (limitations within 10km from homes and a ban on interregional travel) were also lifted on 3 May. On 19 May, non-essential shops, cultural places (museums, cinemas) and the outdoor part of bars and restaurants partially reopened, but with restrictions on capacity: 50% for bars and restaurants (with a maximum of 6 per table), 35% for cinemas, theatres and stadiums and 8m2 per customer for shops and museums. Moreover, the curfew starts now at 9pm instead of 7pm. On 9 June, gyms and the indoor parts of bars and restaurants re-opened (at 50% of capacity). The capacity limit for the outdoor part of bars and restaurants was lifted, while the one on cinemas and theatres was raised to 65%. The start of the curfew was delayed to 11pm instead of 9pm. Rules on remote working were eased. Finally, attendance at some events of more than 1000 people (festivals, shows) was authorised with a COVID-19 health pass. Travel rules were also eased on 9 June: all fully vaccinated people from EU and from some other ‘green’ countries are no longer required to show a negative virus test to enter France, with only a proof of their vaccination status being sufficient. On 16 June, PM Jean Castex announced that the existing 11pm-6am curfew would be lifted on 20 June and masks outdoors would no longer be mandatory from 17 June. Finally, on 30 June, most of existing capacity limits (shops, restaurants, gyms, cultural venues) were lifted. The only exception is for indoor concerts and festivals, where a capacity limit of 75% is maintained. Nightclubs will reopen on 9 July, but with strict protocols (capacity limit of 75% indoors and a required COVID-19 health pass).

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15. Latest on the restrictions from the major European countries Country Latest lockdown measures Italy Since November 2020, Italian regions have been split into three categories – ‘red’, ‘amber’ and ‘yellow’ – depending on several criteria related to COVID-19. The classification is updated on a weekly basis. From 15 January, a ‘white’ category was also introduced with very limited restrictions, but for a long time no regions in that category. In the ‘red’ and ‘orange’ regions, secondary schools are closed, restaurants are shut all day and mobility is restricted to essential reasons (work, health). On top of that, in the ‘red’ regions, all non-essential shops and services (eg, hairdressers) are shut as well as schools from 11 years of age (13 years in the ‘orange’). On 2 June, for the first time since last November, three regions (Sardegna, Molise, Friuli) were put in the 'white' category with hardly any restrictions (other than obligatory mask wearing indoors and outdoors and some social distancing requirements) and more regions were added in the following weeks. As of 23 June, ‘white’ regions cover around 70% of the Italian population, and the press has speculated that from the 28 June the whole country might be ‘white’ (Sky, 21 June). In the latest COVID-19 decree approved on 18 May, the government has laid out a timeline for lifting restrictions at the national level for the 'yellow' regions (these do not apply to 'white' regions). Primary schools were reopened everywhere (up to 13 years of age) while high school attendance is set at between 50% and 100%. Outdoor restaurants, cinemas and theatres and museums have already been allowed to reopen (in the case of restaurants, both for lunch and dinner). There are no more limits for the number of people in restaurants outdoors. From 22 May, shopping centres were also opened on weekends and ski resorts were allowed to re-open (although the ski season is basically over). From 24 May. gyms were allowed to reopen. and from 1 June, indoor restaurants. From 15 June, it will be the time of theme parks and museums, and from 1 July, indoor swimming pools, sport halls, trade exhibitions and congresses. Clubs will be allowed to reopen from 10 July. Home visits to relatives and friends remain permitted once a day, up to a maximum of four people (in addition to the residents). From 19 May, the curfew has been delayed from 10pm to 11pm (still until 5am). It will then be delayed further from 12pm from 7 June and will be abolished altogether on 21 June. From 28 June, wearing masks outdoors will no longer be required (it still is indoors, though). As for international travel, until 31 July, people arriving from the EU, the UK and Israel no longer have to quarantine, but they will be required to show a negative COVID-19 test undertaken within 48 hours before departure.

Spain The Spanish Health Ministry has identified four levels of alert for the regions based on a series of indicators related to COVID-19 infection rates. As of 2 June, for the first time, no region has an 'extreme' risk, and four regions have a 'high' risk level (including the Madrid region). Pressures on the hospital system have eased with ICU occupancy rates from COVID-19 patients having dropped below 10% for the first time since last summer and from over 40% reached at the peak of the third wave of the pandemic in January. Even in the Madrid region ICU occupancy rates are now below 20%. On 9 May, the state of emergency expired and was not extended by the government. With that, the nationwide curfew also came to an end. The freedom to travel across regions has been re-established with no regions maintaining the external border closure in place (even though regions are still imposing travel restrictions in and out from specific areas within the regions). On Saturday 26 June, Spain also eased its face mask rules, making masks no longer necessary in outdoor settings where social distancing is observed. Some restrictions, though, remain in place at the regional level. Some regions impose limitations in terms of the maximum number of people allowed for gatherings and the opening times for restaurants and bars. For example, in the Madrid region, bars and restaurants have to shut at 1am and there remain limitations in terms of capacity (50% indoor and 75% outdoors). On the Balearic Islands, bars can stay open until 2am. On the Canary Islands, bars are open between midnight and 2am (depending on the island). In Catalonia, restaurants can remain open between 6am and 1am, while clubs can reopen from 21 June and remain open until 3.30am, with the requirement to wear a mask. In the Basque Country, bars and restaurants have to close at 2am. Spain has also reopened its external frontier. For entry, a proof of vaccination or a negative COVID-19 test is required. Even then, the UK maintaining Spain in the 'amber' list of countries requiring quarantine upon re-entry could be a setback for the ability of Spain to attract foreign tourists.

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15. Latest on the restrictions from the major European countries Country Latest lockdown measures UK On 4 January, Prime Minister Boris Johnson announced a national lockdown for England, including the closure of all schools. On 22 February, he laid out a new four-step framework for lifting the lockdown. On the first of the milestones he laid out, 8 March, schools reopened and permission to meet one other member of another household outdoors for recreation was added (previously such meetings were only allowed for exercise). On 29 March, there was a further relaxation in outdoor restrictions, allowing outdoor gatherings of up to six people. The second step, implemented on 12 April, saw hairdressers and gyms reopen, and pub and restaurants were allowed to serve customers outdoors (including selling alcohol without food). The third, on 17 May, saw indoor food and drink service, museums, theatres and sports stadia reopened. However, the fourth, which would see the government aim to “remove all legal limits on social contact”, including opening nightclubs, has been delayed by four weeks until 19 July, though some exceptions have been made – for example, weddings can be attended by more than 30 people. It is expected that this stage would see mandatory mask wearing, social distancing and the recommendation to work from home all lifted. For the rest of the UK, plans for further lifting of restrictions vary by country. For most of Scotland, hairdressers and some retailers reopened on 5 April and outdoor hospitality and gyms on 26 April with an indoor alcohol ban lifted and cinemas reopened on 17 May (but it looks like there, too, the final stage of reopening will be delayed, with a target date of 9 August for the removal of all remaining restrictions). In Wales, the next stage of reopening has been delayed by four weeks from 21 June, though some restrictions are expected to reopen even if that stage goes ahead. In Northern Ireland, remaining regulations will be reviewed on 8 July. International leisure travel has no longer been illegal since 17 May with regulations on testing and quarantine requirements guided by a traffic light system with lighter restrictions for amber and green listed countries, depending on their levels of COVID-19 infection rates and variants present (UK Government, 12 May 2021). Inbound arrivals will be subject to the same rules. However, Portugal was the only EU country on the green list originally, and it has now been downgraded to amber. The next review will take place by 28 June. Entry into the UK from a ‘red list’ of 50 countries, including South Africa, Brazil and India, remains banned to non-UK or Irish nationals. As of 15 February, for those who cannot be refused entry from these countries – ie, returning British or Irish nationals – a mandatory 10-day quarantine in government-approved accommodation applies.

Source: Country data, HSBC

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Business sentiment and labour market point to a swift recovery

16. The ifo business climate has surged in 17. …as has the business climate in the service and trade sector in June… France, reaching the highest levels since 2008

Index Germany : ifo business climate (balance) Index Index France: Business confidence Index 40 40 120 120 30 30 20 20 110 110 10 10 100 100 0 0 -10 -10 90 90

-20 -20 80 80 -30 -30 -40 -40 70 70 -50 -50 60 60 2008 2009 2011 2013 2015 2016 2018 2020 Services Manufacturing 50 50 2000 2005 2010 2015 2020 Construction Trade Source: Macrobond, HSBC Source: INSEE, HSBC

18. Consumer confidence in Germany also 19. …which again mirrors the situation in saw a huge improvement in June… France Index Germany : GfK consumer survey Index 80 60 Index France: Consumer confidence Index 130 130 60 45 40 30 120 120 20 15 110 110

0 0 100 100 -20 -15 90 90 -40 -30 2008 2010 2012 2014 2016 2018 2020 80 80 Economic Expectations (LHS) Income Expectations (LHS) 70 70 Willingness to Buy (LHS) 2000 2005 2010 2015 2020 Consumer Climate Indicator (RHS) Source: Macrobond, HSBC Source: INSEE, HSBC

20. Hard German labour market data were 21. …and French short-time workers are impressive in June… returning to their workplaces as well

% Germany : Unemployment s.a. Mn Mn France: Estimation of the number of employees Mn 14 0.4 using the partial unemploy ment scheme 9 9 12 0.3 8 8 Millions 7 7 10 0.2 6 6 5 5 8 0.1 4 4 3 3 6 0.0 2 2 1 1 4 -0.1 0 0

2005 2007 2009 2011 2014 2016 2018 2020

Jul-20

Oct-20 Apr-21

Change (m-o-m) (RHS) Apr-20

Jun-20 Jan-21

Mar-20 Mar-21

Feb-21

Dec-20 Aug-20 Sep-20 Nov-20

May-20 May-21 Unemployment rate (LHS) Source: Macrobond, HSBC Source: French Ministry of Labour

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No short-term relief for the ECB with respect to inflation

22. Although the June flash estimate showed a slight downturn in Eurozone inflation rates…

% Yr Eurozone inflation % Yr 3 3

2 2

1 1

0 0

-1 -1 2010 2012 2014 2016 2018 2020 Headline HICP Core HICP Source: Refinitiv Datastream, HSBC.

23. …the near term outlook is clearly upwards, particularly in Germany… % Yr Germany : Inflation % Yr 4.0 4.0 Forecasts 3.5 3.5 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 -0.5 -0.5 -1.0 -1.0 2015 2016 2017 2018 2019 2020 2021 2022 2023 HICP CPI

Source: Macrobond, HSBC.

24. … with additional inflation pressures 25. …which should limit the ECB’s flexibility to looming in the goods sector… keep the pace of bond buying up in September

% Yr Germany : PPI and CPI % Yr EUR bn PEPP: Weekly purchases EUR bn 10 10 35 35 30 30 5 5 25 25 20 20 0 0 15 15

-5 -5 10 10 5 5 -10 -10 0 0 1995 2000 2005 2010 2015 2020 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 PPI CPI Net purchases Reinvestments* Source: Macrobond, HSBC Source: HSBC calculations, ECB, Bloomberg. *Includes quarter-end adjustment.

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COVID-19 in Western Europe

26. Germany now has the lowest new 27. ...while in France a small up-tick is infection number in Europe… already visible 000s Germany : COVID-19 cases 000s 000s France: COVID-19 cases 000s 4000 32 6000 90

5000 75

3000 24

Thousands Thousands Thousands Thousands 4000 60

2000 16 3000 45 2000 30 1000 8 1000 15

0 0 0 0 Jan-20 May-20 Sep-20 Jan-21 May-21 Jan-20 May-20 Sep-20 Jan-21 May-21 New Cases (RHS) Cumulative (LHS) New Cases (RHS) Cumulative (LHS) Source: Refinitiv Datastream, HSBC. Source: Refinitiv Datastream, HSBC.

28. In Italy there is no sign of an impact by 29. ...in stark contrast to Spain where the Delta variant so far… COVID-19 cases have jumped markedly 000s Italy : COVID-19 cases 000s 000s Spain: COVID-19 cases 000s 5000 45 4000 100

4000 36

3000 75

Thousands Thousands

Thousands Thousands 3000 27 2000 50 2000 18 1000 25 1000 9

0 0 0 0 Jan-20 May-20 Sep-20 Jan-21 May-21 Jan-20 May-20 Sep-20 Jan-21 May-21

New Cases (RHS) Cumulative (LHS) New Cases (RHS) Cumulative (LHS) Source: Refinitiv Datastream, HSBC. Source: Refinitiv Datastream, HSBC.

30. In the UK the increase in case 31. For Switzerland, COVID-19 is not a major numbers is already exponential again issue at the moment 000s UK: COVID-19 cases 000s 000s Sw itzerland: COVID-19 cases 000s 5000 90 800 24

4000 72

600 18

Thousands Thousands

Thousands Thousands 3000 54 400 12 2000 36 200 6 1000 18

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32. Belgian case numbers increased lately 33. Norway remains more or less COVID- in contrast to the Netherlands 19 free 000s Netherlands/Belgium: COVID-19 cases 000s 000s Norw ay: COVID-19 cases 000s 2000 30 140 3.5 120 3.0 1600 24

100 2.5

Thousands Thousands Thousands 1200 18 Thousands 80 2.0 800 12 60 1.5

400 6 40 1.0 20 0.5 0 0 Jan-20 May-20 Sep-20 Jan-21 May-21 0 0.0 NL - New Cases (RHS) BE - New Cases (RHS) Jan-20 May-20 Sep-20 Jan-21 May-21 NL - Cumulative (LHS) BE - Cumulative (LHS) New Cases (RHS) Cumulative (LHS) Source: Refinitiv Datastream, HSBC. Source: Refinitiv Datastream, HSBC.

34. In Sweden there is no clear indication of 35. Ireland has a constant and comparably an uptick in case numbers low rate of new infections 000s Sw eden: COVID-19 cases 000s 000s Ireland: COVID-19 cases 000s 1200 12 300 9.0

250 7.5

900 9

Thousands Thousands Thousands Thousands 200 6.0

600 6 150 4.5

100 3.0 300 3 50 1.5

0 0 0 0.0 Jan-20 May-20 Sep-20 Jan-21 May-21 Jan-20 May-20 Sep-20 Jan-21 May-21 New Cases (RHS) Cumulative (LHS) New Cases (RHS) Cumulative (LHS) Source: Refinitiv Datastream, HSBC. Source: Refinitiv Datastream, HSBC.

36. Portugal meanwhile is retracing the 37. Greece on the other hand still shows UK’s steps regarding their COVID-19 falling new infection numbers situation 000s Portugal: COVID-19 cases 000s 000s Greece: COVID-19 cases 000s 900 18 450 5.0

750 15 360 4.0

Thousands Thousands Thousands Thousands 600 12 270 3.0 450 9 180 2.0 300 6

150 3 90 1.0

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Fiscal measures (in the Big 4 eurozone countries and the UK)

38. Fiscal policy was highly supportive of growth last year even if a significant chunk of support did not make it into the economy due to restrictions and was actually saved % GDP Decomposition of deficit changes in 2020 % GDP 14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0 -2 -2 Eurozone Germany France Italy Spain** UK*

Discretionary One-offs Economic cycle Fiscal impulse Deficit change Source: HSBC calculations based on national statistical institutes, Eurostat and European Commission, 2020 budgets and amendments. Notes: * Refers to fiscal year 2020/21. **Discounting the impact (0.9% of GDP) of the incorporation of 'Sareb' under the public sector. The ‘Economic Cycle’ component for eurozone countries and the Big 4 includes the ‘normal’ short-time work compensation schemes but not the extensions and more generous terms agreed in response to the COVID-19 crisis. For the UK, it includes the Job Retention Scheme (JRS).

39. After the latest significant upward revisions of this year's deficit targets by most eurozone countries, fiscal policy could be even more supportive of growth this year % GDP Decomposition of deficit changes in 2021 % GDP 5 5 4 4 3 3 2 2 1 1 0 0 -1 -1 -2 -2 -3 -3 -4 -4 -5 -5 Eurozone Germany France Italy Spain UK*

Discretionary Economic cycle NGEU 'grants' 2020 One-offs expiring Fiscal impulse Deficit change Source: HSBC calculations based on national statistical institutes, Eurostat and European Commission, 2020 budgets and amendments. Notes:* Refers to fiscal year 2020/21. The ‘Economic Cycle’ component for eurozone countries and the Big 4 includes the ‘normal’ short-time work compensation schemes but not the extensions and more generous terms agreed in response to the COVID-19 crisis. For the UK, it includes the Job Retention Scheme (JRS).

40. Fiscal policy should remain expansive in 2022 thanks to the Next Generation EU fund, while the European Commission has announced EU fiscal rules will remain suspended

Output gap Eurozone: Fiscal policy stance and output gap Output gap 2 2019 2 2018 Fiscal expansion 1 1 2017 0 0 2011 -1 2016 2022* -1 -2 2014 -2 2012 2015 -3 -3 -4 2013 2021* -4 -5 2020 -5 Fiscal tightening -6 -6 -7 -7 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Source: HSBC calculations based on national statistical institutes, Eurostat and European Commission, 2020 budgets and amendments. Note: The adjusted series takes into account that due to ongoing restrictions at least part of the stimulus implemented last year and this year did not actually feed through into the economy but will only do so once restrictions are lifted.

Free to View ● Economics - Europe 30 June 2021

Disclosure appendix Analyst Certification The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Christian Fuertjes Important disclosures This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the clients of HSBC and is not for publication to other persons, whether through the press or by other means. 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14 Free to View ● Economics - Europe 30 June 2021

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