Euro area outlook: Difficult for now – better later

T he euro area economy contracted slightly during the final quarter of 2020 as containment measures were weighing on growth. T he short-term outlook will continue to be determined by infection dynamics and lockdown measures. It is only once infections have come down sufficiently – and those most at risk from the virus have been inoculated – that governments will soften lockdown measures across the board . We expect this to happen by the end of the first quarter. This will trigger an acceleration of growth in the euro area to above potential for the remainder of the year, resulting in annual growth of 4.1% this year followed by 3.5% next year. One risk factor for the medium-term outlook is the deterioration of corporate balance sheets on the back of the 2020 recession. Severely weakened balance sheets could be a significant impediment for a recovery in corporate investment spending. A detailed look at corporate balance sheets, however, s uggest s that this risk is rather small .