Global Daily – How far has the re-opening of economies been reversed?

by: Nick Kounis , Aline Schuiling

Euro Macro: At the eurozone level, exit process has stalled but not yet reversed – Given the second wave of Covid-19 cases, a number of governments in the eurozone have announced new measures to try and control the spreading of the virus. This follows a lifting of broader lockdown measures earlier in the year when new case numbers plummeted in many countries. How far has the exit process reversed? The best-known indicator of the degree of economic restriction is the University of Oxford’s Stringency Index. We show the index in the charts below for the six largest eurozone member states. As can be seen from the charts, four member states (Germany, Italy, Spain and Belgium) continue to see restrictions easing, albeit very mildly. Meanwhile, France has seen a modest stepping up of restrictions, while the Netherlands is the only large economy that has seen a significant re-introduction of restrictions, though the index remains much lower than its peak.

Stringency Index

Source: Oxford University, ABN Group Economics

Stringency Index

Source: Oxford University, ABN Group Economics

We have created a eurozone aggregate Stringency Index based on the Oxford individual country data (see chart below). Following a significant lifting of restrictions over the summer, the index has been flatlining over the last month or so. We thing this suggests that the exit process has stalled, rather than significantly reversed at this stage.

Stringency Index


Source: Oxford University, ABN Group Economics

What are the implications for the economy? This is good news for current activity levels, but very much of the ‘it could be much worse’ variety. There are a number of reasons for caution and why we maintain conviction in our double dip scenario for the eurozone economy. First, the trend appears to be towards new restrictions going forward. Italy imposed new restriction overnight and France, the Netherlands and Ireland may follow this week. Having said that, at least according to reports in the press, the measures being discussed are relatively modest (with the exception again of the Netherlands). Right now governments might more focused on the signalling effect of new measures (to make it clear to people that they need to stick to existing rules) rather than seriously ramping up restrictions. Having said that, if that does not work, more significant and widespread restrictions may follow.

Secondly, the second wave of new Covid-19 cases remains very much in place. In some countries the trend still looks to be accelerating, while in others it is hovering at high levels. This could force the hand of governments. Even if it does not, it could add to caution amongst households and businesses. Third, second round effects from the initial economic shock – such as a deteriorating labour market – will continue to weigh on the economy. Fourth, the stagnation of the exit process will also be a headwind, in the sense that the growth spirt from the lifting of lockdowns has lost considerable momentum (this has been evident in the PMI surveys for August and September and today’s ZEW index for October – see below). Finally, until a vaccine is available and rolled out (we assume this will be the case until mid-2021) a further significant lifting of restrictions is unlikely. (Nick Kounis)

Euro Macro: Germany’s ZEW expectations drop after earlier rises – Germany’s ZEW expectations indicator declined in October, after it had risen during two consecutive months in August and September. The index, which measures the expectations by market analysts and economists about economic conditions during the next six months (balance of ‘improve’ minus ‘deteriorate’) declined to 56.1, down from 77.4 in September. Despite its decline in October, the expectations indicator has remained above its long-term average value of 22. Meanwhile the other part of the ZEW survey, the current conditions index (‘good’ minus ‘bad’) edged higher in October (to -59.5 from -66.2 in September) but remained well below its long term average value of -7. According to the written statement by the ZEW institute the economic expectations had deteriorated on the back of the recent sharp rise in the number of COVID-19 cases, as well as on fear for a Brexit without a trade deal and uncertainties surrounding the outcome of the US presidential elections. At their current levels the combination of the current conditions and the expectations component of the survey are signalling a slowdown in economic activity. This view is in line with our own scenario for the German economy and the eurozone as a whole. Indeed, for the German economy, we expect a sharp technical rebound in Q3, to be followed by growth slowing down again significantly to levels close to zero in Q4. This expected slowdown in the final months of the year will be due to continued social distancing as well as second round effects from the drop in economic activity during lockdowns in Q1 and Q2, such as rising unemployment and rising corporate bankruptcies. (Aline Schuiling)