Global Daily – Surge in Q3 to be followed by contraction in Q4

Euro Macro: The technical rebound in eurozone GDP – On Friday (30 October) Eurostat will publish the first estimate of Q3 GDP growth in the eurozone. We have pencilled in growth of roughly 10.5% qoq, which is above the consensus estimate of around 9.5%. In Q2, economic activity collapsed (GDP contracted by 11.8% qoq) as lockdown measures to limit the spreading of covid-19 were rolled out throughout the eurozone in March-April. Working in the opposite direction, there will have been a jump in GDP in Q3, as these lockdown measures were largely unwound in May-June and large parts of industry and services re-opened.

Nevertheless, social distancing measures have kept activity in parts of the services sector, such as hotels and restaurants, international travel, culture and sports subdued. Moreover, we think that the fundamentals that drive changes in final domestic demand (such as labour market conditions and corporate profitability) have deteriorated noticeably since the start of the pandemic, which will have limited the rebound in private consumption and fixed investment. Finally, disruptions in global supply chains probably had a dampening impact on global trade growth during the first months after the lockdowns. Therefore, the level of GDP in Q3 is expected to have remained around 6% below the level of 2019Q4, which was the final quarter before the pandemic.

A sharp rebound in GDP growth in Q3 has been signalled by the monthly economic data that have been published for Q3 until now, and also by surveys such as the composite PMI. Indeed, growth in retail sales and new car registrations combined (roughly a third of private consumption) jumped to around 8.5% in Q3 (assuming roughly flattish growth in September), up from -4% in Q2. Industrial production increased to +14.4% 3m-o-3m in August, up from -15.8% qoq in Q2. Finally, foreign trade data indicate that net exports contributed positively to qoq growth in Q3 (around 1 percentage point) after it reduced growth by 1 percentage point in Q2. Looking forward to beyond Q3, we expect the economy to move into a double dip recession and we see GDP contracting in Q4. This will be a combined result of a continued negative effect from the fundamental drivers of domestic demand and the impact of the second wave of covid-19 infections. (Aline Schuiling)