29 November 2021

A turbulent period in sight: should investors be concerned?

Philippe Ledent

Philippe Ledent

Senior economist ING

The year 2021 was marked by a strong recovery in the euro area, particularly in the second and third quarters. Indeed, the gradual reopening of the economies in a context of massive vaccination has allowed economic activity to return to a certain normality. Even if the situation still differs from one sector to another, the GDP of many countries in the eurozone, including Belgium, has returned to its pre-crisis level.

That said, the fourth quarter of the year looks more difficult:

  • Problems with the supply of commodities and components of all kinds are weighing on activity, mainly in industry. These problems are linked to the high demand in a context where production capacities are not scalable in the short term. But temporary and local closures of production or export sites in Asia, due to new outbreaks of Covid, are also weighing on the supply chain. Finally, the disruption of global maritime traffic, due to the lockdowns of the past year, is de facto reducing transport capacity.
  • The sharp rise in energy prices has led to a surge in inflation, which is at least temporarily eroding household purchasing power.
  • The new wave of the pandemic is a blow to consumer confidence, and new lockdown measures decided on throughout the euro zone will probably affect economic growth at the end of 2021.

So, without talking about stagnation, economic growth could turn out to be very weak in the fourth quarter, rather like what was observed in the US in the third quarter.

"Economic growth could turn out to be very weak in the fourth quarter"

Will this last?

Clearly, the fourth quarter will be more mixed for the euro area. But the economic outlook for 2022 remains positive:

  • Let's not forget that if there is currently an imbalance between supply and demand, it is also due to a very strong demand. In other words: households want to consume and companies want to invest! This should support activity when supply has the capacity to increase, probably in the course of next year.
  • We are already seeing a reduction of price pressures for many raw materials: wood, iron ore, etc. Energy prices are still historically high, but here again we are seeing a little less upward pressure. This confirms the idea that inflation should ease in 2022, even if it should stabilise at a higher level than in the last ten years.
  • Finally, most governments, both in Europe and the US, have embarked on often ambitious stimulus packages. This should also ensure a continued recovery, in a context where monetary policies should also remain very accommodating. 

What does this mean for investors?

Economically speaking, the end of the year looks more difficult for the eurozone. The markets have already taken on board the supply constraints and the surge in inflation. On the other hand, they could still react negatively to the wave of Covid affecting Europe. That said, the current headwinds do not call into question our scenario of a continued economic recovery in 2022. For an investor looking beyond the very short term, this does not change much. In our view, the eurozone retains our confidence... and therefore its place in investment portfolios.

"The current headwinds do not call into question our scenario of a continued economic recovery in 2022."

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