Rapid progress in the vaccination program, together with favorable weather, made for a bright European summer. The number of new COVID-19 cases and fatalities has fallen from the winter peak, allowing the elimination of most restrictions and increased mobility. Importantly, the Delta variant left a comparatively weak mark on the region, with cases rising only modestly. 

The fading pandemic allowed European economies to rebound rapidly in the second and third quarters. This pushed GDP around Europe back to pre-pandemic levels—albeit not to levels where it would have been in the absence of the pandemic, meaning that the output gap is still significant. Growth was powered by sectors that were most depressed by the pandemic, such as trade, food and accommodation, and transportation, reflecting the process of output returning to normal.

The next phase of the recovery will be harder. Not only will there be no further boost from reopening, but powerful new shocks are hitting the economy. Chief among them are price pressures originating from a spike in commodity prices and supply-chain disruptions due to the Delta variant hampering production in Asia. These factors are pushing up prices for all types of inputs, from energy to raw materials, or even lowering output as companies struggle to produce finished products. This will result in slightly lower economic activity and—more importantly—a higher spike in inflation than originally expected throughout the rest of the year.