- The pandemic second wave is nasty enough for the trend towards more stringent restrictive measures to continue. Data already suggests the deterioration in confidence goes beyond the most exposed sectors.
- Don’t overstate China’s capacity to kick-start the global economy. Imports remain unfortunately subdued.
- The ECB meets this week. Expect hints at a December move, but no hard announcement this time.
Focusing on the number of cases to gauge the strength of the second wave of the pandemic relative to the first one is probably misleading given the increase in testing capacity. Still, the high ratio of positive cases to the number of tests, as well as the hospitalization rate suggest that the virus continues to propagate at a fast clip, albeit in a less explosive manner than in March and April. The trend towards more stringent Covid-suppression measures will continue, at a growing cost to the economy.
The services sector is specifically struggling, but we find quite concerning that, even if the most exposed industries such as hospitality are softening more than the others, there are growing signs that all sectors are hit. Settling in a “90% economy”, with large sectoral divergence, would not be a benign outcome. Given the unavoidable spill-over effects, via the labour market or the financial industry, aggregate output would fall by more than the direct contribution from the exposed sectors.
During the last recession, export-reliant developed countries had benefited from China’s strong, stimulus-driven recovery. A year after the trough in the global economy in 2009 Chinese demand had contributed more than 2 percentage points to the overall growth in German exports, boosting GDP by 1%. We are not counting on a replication. While Chinese exports have resumed their pre-pandemic strong pace, with market-share gains in Europe, the rebound in Chinese imports has been much less pronounced. Whoever wins the US elections, Beijing will remain under pressure to open more to foreign trade, but this may be done by selectively raising imports from the US – as per the logic of the current agreement. Europe may not benefit much.
The ECB’s September economic outlook is looking increasingly over-optimistic. We are not counting on any hard announcement by Christine Lagarde at this week’s press conference though. We continue to expect an extra layer of accommodation in December, to which the ECB President should hint in generic terms on Thursday.