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The initial estimate of eurozone GDP growth in Q3 far surpassed
expectations.
But renewed COVID-19 restrictions point to a sizeable GDP
decline in Q4.
Whether the eurozone can avoid another technical recession is
uncertain at this point.
Either way, the road back to pre-pandemic output levels will be
a long one.
Huge positive surprise in Q3…
Eurostat's preliminary flash estimate for Q3 GDP in the eurozone
delivered a huge upward surprise. The record q/q increase of far
surpassed the market consensus expectation (9.3% according to
Reuters' survey) and also IHS Markit's baseline forecast
(8.3%).
Among the larger member states, upward surprises in Q3 were most
pronounced in France (18.2% q/q), Italy (16.1% q/q) and Spain
(16.7% q/q), partly reflecting their relative underperformance in
the prior two quarters. German GDP also surprised to the upside
(8.2% q/q) but by a much smaller margin.
On a y/y basis, eurozone GDP fell by 4.3% in Q3 2020, a
double-digit improvement relative to Q2's record contraction
(-14.8%). Unfortunately, that's where the good news ends.
Despite Q3's record rise, GDP remained 4.3% below its
pre-pandemic level back in Q4 2019 given the exceptionally large
prior declines in the first half of the year. Moreover, estimates
for Q4 (at least) are having to be radically downgraded to reflect
recent COVID-19 trends, related restrictions and their adverse
impact on economic activity, in the service sector especially.
…overtaken by subsequent events
The initial strong "mechanical" rebound in activity from May to
July had already started to fade in August and with containment
measures reintroduced across the eurozone thereafter, upcoming
"hard" activity data are likely to deteriorate markedly, in line
with signals from recent leading indicators.
For example, IHS Markit's composite PMI output index for the
eurozone dropped for the third straight month in October, falling
back below the 50 expansion level for the first time since June.
Forward-looking sub-indices including new orders and output
expectations both suggest more weakness to come, as do higher
frequency indicators including Google mobility indices.
Containment indices and PMIs signal Q4
contraction
Our COVID-19 containment indices for the eurozone also point to
more weakness ahead. Based on our current index for the eurozone as
a whole, the composite PMI output is likely to fall significantly
further before year-end, to a level of around 40.
In the past, an average quarterly level of the PMI of this order
of magnitude has been consistent with q/q GDP contractions in the
eurozone of around 2% q/q. This currently looks like a fair bet for
the actual outcome in Q4, though with uncertainty about the
evolution of COVID-19 so high, it is very difficult to predict with
any accuracy at this juncture.
Technical recession could be avoided…
The same goes for Q1 next year. Using Ireland as a template,
where the national lockdown appears to have been relatively
successful, there is a good chance that some restrictions will be
eased before the critical Christmas period, generating a positive
carry over for Q1 growth. But Q1's performance is highly vulnerable
to an extension of restrictions.
Another "technical" recession (i.e. successive q/q contractions
in GDP) cannot be ruled out, therefore, though our inclination at
present is towards a modest pick-up in Q1. Either way, the key
point is that it is going to be a very long time before some parts
of the economy return to anything like normal and GDP "crossovers"
(i.e. a return to pre-pandemic levels) are likely to be several
years away in some of the more vulnerable economies in the
periphery of the eurozone: e.g. the most services-sensitive, with
the least policy space, including Italy and Spain.
…but higher unemployment won't be
The first estimate of Q3 employment will be released on 13
November. Q2 saw a record q/q decline of almost 3% and while
business surveys like the PMIs suggest that the rate of contraction
in jobs has eased, the unemployment rate across the eurozone has a
long way further to rise.
It was stable at 8.3% in September, just over a percentage point
above its cycle low at the start of the year. Lags between output
and employment losses can be long in the eurozone. During the
Global Financial Crisis, the eurozone economy hit rock bottom in Q1
2009 but the unemployment rate did not peak until Q2 2010.
This time around, given the various labour support schemes in
place, the lags will be even longer still, though the unemployment
rate will still have to rise nonetheless as a return to
pre-COVID-19 levels of output is not feasible any time soon. This
will lean down on the pace of the subsequent recovery following the
imminent GDP contraction.
Posted 09 November 2020 by Ken Wattret, Vice President, Economics, IHS Markit
