Covid surge threatens Europe’s economic recovery

So far, the new Covid-19 wave is having only a limited impact on business activity in the 19 countries that use the euro. The Purchasing Managers’ Index from IHS Markit, a key gauge of the economy, rose in November after slipping to a six-month low in October, according to data released Tuesday.

But expectations for the future are darkening. Austria announced last week that it’s going back into a national lockdown. Skyrocketing infections in Germany have also sparked questions about whether the region’s largest economy could reimpose sweeping restrictions.

“A stronger expansion of business activity in November defied economists’ expectations of a slowdown, but is unlikely to prevent the euro zone from suffering slower growth in the fourth quarter, especially as rising virus cases look set to cause renewed disruptions to the economy in December,” said Chris Williamson, IHS Markit’s chief business economist.

Consumer confidence in the euro zone fell “markedly” in November, according to the European Commission. IHS Markit reported that companies’ expectations this month for future economic output “deteriorated to the lowest since January.”

Ruben Segura-Cayuela, Europe economist at Bank of America, said more data is needed to assess what restrictions in Europe could mean for the region’s economy. He noted that with each wave of Covid-19 infections, the economic impact has declined as businesses and consumers learn to cope.

“We know there will be a reaction, we just don’t know if it’s going to be the same magnitude,” he said. “I would assume, based on what we’ve seen over the last few months, it’s going to be smaller.”

Europe was hit particularly hard by the pandemic in 2020. Economic output fell by 6.3% in the euro zone compared to a 3.4% decline in the United States.

But the region has rebounded in recent months as vaccination rates have jumped. Gross domestic product in the euro zone rose 2.2% between July and September compared to the previous quarter.

Much now depends on how the situation unfolds in Germany, said Jessica Hinds, Europe economist at Capital Economics. She thinks it’s “plausible” that Europe could stagnate at the end of the year if its biggest economy enters a lockdown.

“We are likely to see some hit to economic activity just as rising case numbers make consumers more fearful and governments require more stringent Covid pass [screening] for various activities,” Hinds said.

Starting Wednesday, German employees must present a negative Covid test, their vaccination status or proof of recovery from the virus in order to go to work. If they can’t work from home, they may not be paid. And from Saturday, Berlin will bar non-vaccinated residents from hotels, restaurants, bars and shops, with the exception of grocery stores and pharmacies.

German inflation hits 29-year high as energy costs spike across Europe

The manufacturing sector in Germany also remains under pressure as supply chain problems continue to rattle automakers and other producers.

In addition to coronavirus cases, Europe is dealing with the effects of an economic slowdown in China, as well as rising inflation and an energy supply crunch that could raise costs for businesses and make it more expensive to heat homes this winter. That could hurt consumer spending more broadly.

Segura-Cayuela said that some positive elements of the recovery are still playing out. Excess savings built up earlier in the pandemic, for example, are helping to mitigate the harmful effects of inflation on people’s incomes.

“There are still reopening forces helping growth in the near term,” he said.

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