As the world continues dealing with the COVID-19 pandemic, in recent weeks, many European countries have been forced to reinstate lockdown measures to combat a second wave of infections. Let’s examine some of the data that will guide us in monitoring the European economies for the remainder of 2020 and into 2021.
Europe’s Largest Economies Will See Sharp GDP Contractions in 2020
In its October 2020 World Economic Outlook (WEO), the International Monetary Fund (IMF) raised its economic projections compared to its April WEO publication but noted that “the global economy’s long ascent back to pre-pandemic levels of activity remains prone to setbacks.” While summer reopenings led to a surge in third-quarter GDP growth following the second quarter’s lockdown-induced slowdown, this second wave of infections heading into the winter months could prove a drag on fourth-quarter growth. According to analysts surveyed by FactSet, Europe is expected to see positive quarterly growth in the fourth quarter, but that could change as the recent implementation of renewed lockdown measures dampen economic activity. The most recent consensus estimates from FactSet indicate that the Eurozone economy will shrink by 7.9% in 2020, led by declines of 11.9% in Spain, 10.0% in Italy, and 9.8% in France. The German economy will shrink by just 5.6% while the UK economy contracts by 10.0%.
The Fiscal Policy Response Will Lead to Growing Country Debt
In response to the pandemic, individual countries have reached into their coffers to provide economic support using a variety of government programs. These programs have been largely designed to prevent companies from going out of business allowing workers to keep their jobs or to provide direct supplementary unemployment benefits to those who do lose their jobs. The scale of these programs has been massive, leading to explosions in country budget deficits. According to FactSet’s latest consensus estimates, the Eurozone overall budget deficit is projected to jump to 9.5% of GDP in 2020. Many countries in Europe were already dealing with massive government debt; surging government budget deficits will only exacerbate this problem.
French Business Confidence Deteriorated in October
We’re already seeing the negative economic impacts of the resurgence of COVID-19 cases across Europe in the business sentiment numbers. In France, after five consecutive months of improvement, business confidence among French manufacturers slipped in October. According to French statistical agency Insee, the manufacturing business climate composite indicator slipped to 93.4 in October from 94.5 in September. This marks the eighth month in a row that the index has remained below its long-term average of 100. On the demand side, manufacturers’ assessments of new overall orders and new export orders both worsened for the month, with both metrics remaining well below their pre-crisis levels.
Impact on the UK Labor Market
After the UK went into its initial lockdown in late March, the government created the Coronavirus Job Retention Scheme to protect struggling businesses and workers. With benefits backdated to March 1, the program allowed employers who were forced to close their operations to keep their employees on their payrolls, with 80% of their wages covered (up to £2,500) by the government. Starting on August 1, the program gradually reduced the government’s contribution and increased the share paid by employers every month. The so-called “furlough scheme” was supposed to end on October 31, but in light of the recently imposed second national lockdown, it has been extended until at least the beginning of December.
This program has prevented a surge in unemployment, but the economic impact is showing up in other UK statistics; in particular, aggregate weekly hours worked have dipped to levels we haven’t seen in 20 years. While the furlough scheme has helped keep businesses and workers afloat over the last seven months, there is likely more economic pain still to come when the program ends.
Italian Confidence Levels May Have Stalled
While Italy’s consumer and business confidence surveys have recovered from the lows seen in the early months of the pandemic, the readings remain well below those from a year ago. Italy’s statistical agency, ISTAT, reported that consumer confidence slipped to 102.0 in October from 103.3 in September; this compares to an October 2019 reading of 111.2. Meanwhile, October business confidence improved for a fifth consecutive month, rising to 92.9 compared to 91.3 in September; the October 2019 reading was 98.3. However, after remaining flat through the summer and into September, Italy’s COVID-19 cases began to rise sharply in October, followed by a surge in deaths in just the last two weeks. Just this week the government implemented new restrictions, including partial lockdowns and curfews. These renewed lockdowns are likely to cause the nation’s confidence levels to retreat again and deal yet another blow to economic growth.