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The rebounds in Q3 across Europe generally surprised on the
upside. However, economies remain well below their pre-COVID-19
peaks and cumulative contractions in 2020 are very large by
historical standards. Countries that have contained the virus
better have tended to outperform economically.
Where underlying drivers are available, the rebound in Q3
tended to be broad-based with both domestic demand and external
sectors contributing towards the recovery. The recovery in
household consumption tended to be of particular importance.
A resurgence of COVID-19 and a second round of lockdowns is
expected to cause contractions in many European economies in Q4.
The key risks to the outlook is another tightening of restrictions
following the festive period and a delay in the roll-out of
vaccines or their relatively low take-up.
Strong but partial rebounds in Q3
The recent releases of Q3 GDP across Europe tended to surprise
on the upside, indicating a strong, albeit partial, rebound after
the historic contractions in H1 2020. The largest growth rates in
Q3 were in France (+18.7% q/q), Spain (+16.7% q/q) and Italy
(+16.1% q/q). The Eurozone as a whole grew by 12.6% q/q, while the
UK was up by 15.5% q/q. However, the largest rebounds tended to be
"mechanical", occurring in economies that contracted the most in H1
2020. As a result, these also tend to record the largest cumulative
drops of activity in the first nine months of 2020.
Comparing the level of GDP in Q3 2020 relative to the
pre-COVID-19 peak, the best performers were Norway, Switzerland and
Poland, which were only around 2% smaller. On the opposite end, the
worst performers were the UK and tourism-sensitive Spain and Malta,
down by over 9% compared to their pre-COVID-19 peaks. Importantly,
countries that contained the virus more successfully, with fewer
recorded deaths, tended to suffer smaller loses and bounce back
more quickly.
This indicates that there is no trade-off between health and the
economy, but that the two are complementary. A quicker suppression
of the virus allowed for a quicker re-opening of economies and the
return of spending among households and businesses.
Detailed breakdowns highlight the importance of
household consumption
The underlying drivers for GDP are not yet available for all
economies. Where the data is available, it points to the rebounds
being broad-based, driven by both domestic demand and net exports.
It also highlights the importance of household consumption. In most
European economies, household consumption outperformed overall GDP
relative to pre-COVID-19 peak. This wasn't the case in UK, Italy or
Spain, which also were the worst performers overall. The drop in
household consumption in Sweden was larger than the fall in its
overall GDP, despite the absence of a formal lockdown and
relatively lighter restrictions throughout, and on a par with
Denmark, which suffered much fewer deaths.
The external sector provided key support, aided by the easing of
COVID-19 restrictions in the US, China and other major economies.
For European economies where data is available, the rebound in
exports of goods and services tended to match or outpace the
rebound in imports.
Fixed investment has generally seen the smallest rebound,
reflecting the elevated uncertainty faced by businesses. Measuring
output in the public sector has proven to be a particular
challenge, due to the closure of schools and re-orientation of
health systems to tackle the pandemic. The lack of a uniform
approach has resulted in different quarterly dynamics, but these
should re-align in the medium term.
Outlook largely depends on the evolution of the
pandemic
Following the historic contractions in H1 2020 and partial
rebounds in Q3 2020, we expect a renewed contraction in many
European economies, including the Eurozone, in Q4, amid a
resurgence of COVID-19 and new lockdowns. However, we expect this
contraction to be significantly smaller than earlier in the year,
owing to several factors. First, the full or partial lockdowns tend
to be less severe than in the first wave with manufacturing and
construction sectors continuing to operate, while schools remain
largely open. As a result, there is a marked divergence between
manufacturing and services sectors in Europe.
The relatively lighter restrictions are also evident from
real-time activity indicators with mobility stabilizing at a higher
level, indicating a smaller drops in activity than in the first
wave.
Second, external demand is expected to remain supportive with
China, the US or other major economies avoiding a second wave of
lockdowns. This is in contrast to the first wave, when demand was
withdrawn simultaneously. Third, businesses have had time to adjust
and shift more of their sales online. This means that the new round
of restrictions is likely to cause fewer supply-side
disruptions.
In the near-term, the outlook will be mainly determined by the
evolution of the pandemic and the wide availability of effective
vaccines. Regarding the pandemic, the latest signs are positive, as
the recent restrictions have suppressed the epidemic curves across
Europe and the emphasis has shifted to managing the re-opening
without a new surge in cases. The key risk is that the increased
social interaction during the traditional festive season will
accelerate virus transmission, requiring a renewed tightening of
restrictions in Q1 2021. Recent news about the high efficiency of
several vaccines and their potentially fast-tracked approvals
present an upside risk for our baseline assumption of a wide
roll-out in mid-2021. However, the roll-out presents serious
logistical challenges, while recent survey data from across Europe
indicates growing skepticism about vaccines. A slower progress in
vaccinations would likely result in a "floor" level of restrictions
remaining for longer, weighing down on activity.
The risk of a premature withdrawal of policy support over the
coming months has significantly diminished, as most European
governments extended pandemic-related fiscal measures and the
European Central Bank has pre-announced a new easing package at its
December meeting. Continued fiscal and monetary support is vital to
ensure a strong economic recovery, even after the immediate health
emergence subsides.
