Global Economy Briefs

Comparing the economic impact of the spring and fall lockdowns in Europe

December 04, 2020

Most European countries went into a second lockdown in November. How will this lockdown impact economic growth, jobs and business confidence? The short answer is: milder than feared.

A year ago, we could not imagine that this would happen once, let alone twice. And yet here we are, still teleworking, not going to restaurants, and doing our shopping online. The first lockdown generated an unprecedented negative shock to the European economy almost simultaneously with the global economy. Gross Domestic Product (GDP) shrunk about 12 percent in France, UK, Italy and Spain and about 7 percent in Germany in the first half of 2020 compared with the second half of 2019. Over the summer, the European economies reopened, prompting a better-than-expected recovery in economic growth in the third quarter.

Now two questions are on everyone’s mind: (1) will we be able to celebrate Holidays with our families, and (2) what is the economic impact of the November lockdown? Surprisingly enough, we know more about the latter than the former.

According to our estimates, the contraction generated by the November lockdown is a fraction of the contraction generated by the first lockdown. We find evidence among three sets of data (see Table 1):

1. Google Mobility Reports: Trips to shops in April relative to January were down by over 30% in Germany, and about twice that number in France and the UK. Data for the first three weeks of November suggest another steep drop in activity, but at about half the magnitude of the Spring lockdown.
2. Purchasing Manager Indices (PMI): Flash PMI’s for November all point to declines, with Service sector activity in Germany, France and the UK all in negative territory while manufacturing is generally holding up much better. But the current declines (in the range of 3 to 8 points) are small compared to those in the first lockdown, when PMI’s fell by over 30 points.
3. Monthly GDP: Based on these PMI data, we estimate that the monthly level of GDP in Germany will be only about -0.5 percent lower in November compared to October, further down to about -3 and -4 percent for the UK and France respectively. This compares to falls in GDP between 14 and 25 percent in April versus February.

Table 1: Comparing the economic impact of the spring and fall lockdowns in Europe

 

Notes: Change in mobility for the categories ‘Grocery & Pharma’ and ‘Retail & Recreation’ relative to the median of the five-week period between 3 January and 6 February 2020

Sources: Calculations by The Conference Board using data from Google Mobility reports, PMI data from Markit and monthly GDP for the UK sourced from ONS, while data for France and Germany are estimated by The Conference Board, as are the October and November GDP levels for all countries.

What do these estimates mean for economic growth?

First, a relatively mild restrain in commercial activity in November means that there will be a contraction in Q4 in most countries, but it will not be severe, especially compared to the contraction experienced in Q2. Among the large European countries, only Germany is expected to avoid another contraction, with a GDP growth rate of 0.9 percent compared to the previous quarter. However, despite the relatively mild contraction in November, 2020 confirms to be a disastrous year for European economies. We expect GDP in the final month of this year to still fall 5 percent short of its January level in Germany, Italy and France, going up to about 10 percent in the UK and Spain. In other words, European economies are still producing significantly less at the end of this year compared to pre-pandemic times.

Second, the surge in cases in Europe in September and October, and the subsequent lockdowns of November has not impacted business confidence in a material way. Most CEOs surveyed in the second half of October for The Conference Board Measure of CEO Confidence™ for Europe by ERT, view prospects for their industry over the next six months with cautious optimism. Many CEOs (44 percent) expect business conditions to improve in their industry. Just 16 percent expect conditions to deteriorate and 40 percent see no change. The CFO of IKEA, Martin van Dam expressed that very well in a recent interview in the Financial Times on November 3rd: “This lockdown is incomparable to the first one. The big thing is we don’t stop production. There are slower sales, but there is not the inefficiency of the first lockdown”…. “About one in 10 of Ikea’s stores are closed — in France, Israel, Ireland, Czech Republic, Slovakia, Belgium and the UK — but the effects have been mitigated by allowing customers to collect online orders from some shops. At the peak of Covid-19 in April, about three-quarters of Ikea’s 450 stores were closed — on average for seven weeks each.”  

Moreover, the details of the survey point to positive capital investment plans. While high uncertainty is usually not conducive to investment, the exceptional nature of the current crisis may provide incentives for companies to increase investment in certain areas or on critical technologies, including: accelerating digital transformation; better equipping the workforce to become more productive while working remotely; and developing new ways to reach customers.

What is less clear is the overall impact of the pandemic on the labour market. Indicators are sending mixed signals. On the one hand, unemployment has been rising since July, and 51 percent of CEOs and Chairs expect employment to decrease in Europe in the next six months, 45 moderately and 6 percent significantly. On the other hand, employment and labour force participation increased in Q3 compared to Q2, even though they are still below pre-pandemic levels. Moreover, in several countries furlough schemes are still in place to cushion the impact of the second wave. At this stage, whether the jobs Armageddon of 2021 can be avoided is still an open question.