Overall sentiment indicators reflect a rather neutral environment, leading to a one-point drop in our barometer, which now stands at -7. This sentiment can largely be attributed to household and business uncertainties regarding the vaccine rollout and the state of the economy overall - uncertainties that will likely persist over the coming weeks.
Starting with Luxembourg, macroeconomic data indicate a more favorable environment when compared to other euro area countries. Both domestic and cross-border employment continue to grow, with about 8,500 net salaried jobs having been created in 2020. In addition, both loans for house purchases and consumption loans have increased considerably, after having recorded a steep drop at the beginning of the pandemic. The fund sector remained resilient during the crisis, with UCIs increasing their AuM by 5.4% year-on-year, despite the initial nosedive in March 2020.
For the euro area, GDP fell by 0.7% quarter-on-quarter, less than the 1 to 2% decline expected by Eurostat. The hardest-hit sector was household consumption, while exports, investments and public consumption remained more resilient. The IMF and the European Commission forecast a GDP growth of approximately 3.75% for 2021 and 2022. The loose monetary policy and fiscal support that aim to enhance consumption and investments will continue to be implemented in the coming months.
The Eurozone PMI composite stood at 48.8 for February, slightly up from the January figure. However, a deeper look indicates that certain activities recorded significant growth, while others remain stagnant or negative. According to IHS Markit, the manufacturing sector recorded a strong pick up in activity and was met with higher demand from consumers and other businesses, while the services sector (and especially activities that are impacted by the restrictions) recorded once more negative growth. As a result of the increased demand for goods coming from the manufacturing sector, businesses faced higher input prices and delivery delays of necessary materials.
Health-related restrictions remain tight while many economists expect inflation to return in the coming months. In January, the M3 money supply increased by 12.5% year-on-year in the euro area. This could trigger higher inflation as curfew and other health-related restrictions are starting to loosen.
Among the main counterparts of money supply increase, the credits to the general government experienced the highest growth, with a 22.9% increase during the same period. However, it seems that the money borrowed by sovereign states has been well injected into the system. For example, the household saving rate broke historical records in Q2 2020, at 24.6%, before falling in Q3 to 17.3%. Despite this decrease, it remains 4.4% above the Q3 2019 figure. Moreover, the yield curves of triple-A rated euro area government bonds are steepening; this is a clear indication of inflation expectations since investors now require more returns for the same levels of credit and liquidity risk.