Articles
22 December 2020

Is another technical recession on the cards for the Eurozone?

Easing and tightening restrictions ahead of the holiday season has become a bit of a whack-a-mole game for European policymakers. But given that restrictive measures will bleed into 1Q21, we think the risk of another technical recession is rising. A textbook case for how things will first get worse before they finally get better

A game of whack-a-mole

The second wave of Covid-19 has turned into a game of whack-a-mole for European policymakers as slower infections rates thanks to lockdowns in one country are followed by faster infection rates in others.

The strict November measures in France, Belgium and Ireland have ended with eased restrictions in December, while Germany, the Netherlands and other countries have substantially tightened measures which will last until January.

Recent news of the highly contagious virus mutations has not only increased risks of more lockdowns but also tighter restrictions, which means the second wave will dampen economic activity well into the first quarter of 2021.

Current restrictions in the Eurozone

Source: ING Research and national government announcements
ING Research and national government announcements

The economy has proven to be fairly resilient, gives that the measures are softer than during the first wave.

For example, the new restrictions have so far excluded the industry, which has experienced a strong start to the fourth quarter in terms of economic performance. October data on production and exports shows the industry continued to recover as the service sector struggled with the closure of the hospitality sector. Survey data for November and December suggest production continued to grow even as restrictions tightened, softening the blow for the eurozone economy.

However, the latest restrictions, as well as short-term supply chain effects from the temporary closure of EU borders to the UK and involuntary long Christmas breaks for employees still hint towards a further weakening of the manufacturing sector.

Mobility data shows modest decrease in activity

Mobility data shows that the decline in population movement has been much smaller in the fourth quarter than during the first wave of the pandemic.

For the eurozone average, the low point in the fourth quarter of our mobility index based on Google mobility data was on 12 November at 71, which is 29% below pre-Covid-19 levels measured in January and February. In mid-April, this was 42.5.

This should translate into a milder impact on the economy, although a dip in GDP for the fourth quarter is unavoidable given the severe impact of partial closures.

Start of December shows a surge in mobility in most eurozone economies

Note: Index of activity since 15 February for retail & recreation, groceries & pharmacies and workplaces using Google Covid-19 Community Mobility Report with data through 24 November. 100=baseline of activity between 3 Jan and 9 Feb

Source: ING Research, Google Covid-19 Community Mobility Reports
ING Research, Google Covid-19 Community Mobility Reports

The downside to milder restrictions

The downside to milder measures is that the number of infections is just not coming down by as much as hoped.

In fact, December – usually the busiest time of year for shopping – has seen a sharp increase in activity that relates in part to holiday shopping, but also commuting to workplaces has risen quite quickly and stood at the highest level since the first lockdown on 15 December, until the German lockdown took effect.

The strict German and Dutch measures are directly related to the increase in new cases.

Within a few days of data on both countries, we see the Dutch index falls to just over 70 – the chart above shows the seven-day averages and is therefore still around 80 – while the German index has hardly moved. Overall, eurozone activity has therefore not been impacted much, but it is very early days in terms of data.

Early December rise in activity was broad with workplace mobility rising to highest level since March

Note: Index of activity since 15 Feb using Google Covid19 Community Mobility Reports with data through 24 November.

100=baseline of activity between 3 Jan and 9 Feb

Source: ING Research, Google Covid-19 Community Mobility Reports
ING Research, Google Covid-19 Community Mobility Reports

Risks of a technical recession rise

The increase in mobility in December ahead of the stricter lockdowns won't necessarily translate into stronger economic activity as seasonal effects haven't been taken into account. In other words: people always shop more in December, so it’s hard to tell whether the mobility data for December suggest a good or bad Christmas from a retail perspective as there is no comparable data.

But don’t expect the harsh lockdowns in Germany and Netherlands to have a similar effect as they did during the first wave. Nonetheless, the impact will be significant and drag the 4Q GDP figure much deeper into the red. With the virus mutating, and no let-up in the curve, the risk of extended and tighter restrictions beyond mid-January has clearly increased.

We remain optimistic about the medium-term prospects for the eurozone economy. The latest developments suggest a high risk of another small dip of the economy in 1Q and hence a technical recession

We remain optimistic about the medium-term prospects for the eurozone economy on the back of the vaccine, ongoing monetary and fiscal stimulus, the latest and possibly additional stimulus packages in the US and the continuing v-shaped recovery in Asia.

But there are plenty of caveats. However, all of this suggests a high risk of another small dip of the economy in 1Q and hence a technical recession. A textbook model for how things will first get worse before they finally get better.

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