Latest data highlight divergence across the euro-zone - Capital Economics
European Economics

Latest data highlight divergence across the euro-zone

European Economics Weekly
Written by Jack Allen-Reynolds

The economic data published this week confirm that euro-zone member states have had very different experiences of the virus so far. This is likely to continue, with Germany outperforming and Spain lagging behind. Meanwhile, the jump in euro-zone core inflation in July was a one-off, and we expect it to fall to about 0.5% by the end of the year.

Huge variations in scale of Q2 contraction

The Q2 GDP data published this week highlight that euro-zone member states have had very different experiences of the coronavirus crisis so far, reflecting the variation in the number of virus cases and fatalities, as well as the timing and extent of government containment measures.

Chart 1 shows the decline in GDP from the final quarter of last year to the second quarter of this year. The euro-zone economy contracted by 15.4%, with Germany doing better than average and the other major economies doing worse.

Chart 1: Change in GDP (Q4 2019 to Q2 2020, %)

Sources: Refinitiv, Capital Economics

There are likely to be significant differences in the pace of recovery too. Clearly the biggest risk to the outlook is of a second wave of the virus across the region and the re-imposition of nationwide lockdowns. That risk currently looks greatest in Spain, but given that the rise in daily infections there does not appear to have been caused by any country-specific factors, it wouldn’t be surprising if cases began to rise more quickly elsewhere too. (See here.)

Another key determinant of the strength of the recovery will be whether there is a rebound in tourism. Among the major economies, Spain again looks most vulnerable to lasting weakness in tourist numbers because it is heavily reliant on foreign tourists. By contrast, Germany might actually benefit if the uncertainty about international travel prompts Germans to take more “staycations”. (See here.)

Unemployment to keep on rising

June’s labour market data, published on Thursday, also showed significant variation across countries. Spain stands out once again, because the implied drop in employment there has been far greater than in any other country since the crisis began, perhaps due to its reliance on tourism and the high share of workers on temporary contracts, which make it easier for firms to shrink their workforce.

Italy is another outlier, this time because it is the only country where the measured number of unemployed people has fallen since the crisis began. This is because a lot of jobless people stopped looking for work, so were reclassified from unemployed to inactive. It is a bit of a puzzle why this has happened in Italy and not elsewhere, but it has begun to reverse over the past few months.

The big picture is that unemployment in the region is rising and is likely to continue increasing for some time. We suspect that the euro-zone jobless rate will peak at around 10% next summer before falling back only slowly. (See here.)

Jump in core inflation just a one-off

July’s inflation data were a real mixed bag, with inflation rising sharply in some countries but falling in others. The increases were largely due to non-energy industrial goods inflation, which seems to have been a result of a delayed start to summer sales. In Italy, this caused the inflation rate for clothing and footwear to shoot up from +0.4% in June to +18.7% in July. This effect will reverse in August.

Euro-zone services inflation fell to its lowest level in four years, consistent with our view that the crisis has been disinflationary. (See here.) We forecast core inflation to fall to about 0.5% by the end of 2020 and remain around that level for several years to come.

The week ahead

Next week, we expect data to show large rises in euro-zone retail sales and German industrial output in June. July’s PMIs for Italy and Spain are set to have been weaker than those for Germany and France.


Data Previews

Euro-zone Composite PMIs (July) Wed. 5th Aug.

Forecasts

Time (BST)

Previous

Median

Capital Economics

Spain

08.15

49.7

51.5

Italy

08.45

47.6

52.5

Italy’s recovery continues to outpace Spain’s

July’s PMIs will show that Italy’s economy has continued to recover at a faster pace than Spain’s. But activity in both countries is well below normal.

Flash estimate for July showed that the euro-zone Composite PMI rose from 48.5 in June to 54.8. Both France’s and Germany’s indices were well above 50, at 57.6 and 55.5, respectively. The press release confirmed that activity rose (i.e. indices were above 50) in the region outside of France and Germany, and the available data suggest Italy’s and Spain’s PMIs were around 52.0.

High frequency data suggest that mobility in Italy has returned to “normal” levels, whereas in Spain it has levelled off below normal. (See Chart 2.) That is not surprising, given the latter’s greater reliance on tourism and renewed rise in virus cases. So we have pencilled in a bigger increase in Italy’s PMI.

Overall, though, the PMIs do not tell us all that much about the level of economic activity, which we suspect is still well below where it was before the virus in the euro-zone as a whole. And Spain is likely to lag the recovery in the euro-zone, particularly since local lockdowns are being re-imposed there.

Chart 2: CE Mobility Trackers

Source: Capital Economics

Euro-zone Retail Sales (June) Wed. 5th Aug.

Forecasts

Time (BST)

Previous

Median

Capital Economics

Retail Sales m/m(y/y)

10.00

+17.8% (-5.1%)

+8.4%(+0.4%)

+6.0%(-0.5%)

Retail sales close to pre-crisis level

Euro-zone retail sales are likely to have got close to their pre-crisis level in June. But other areas of the economy will have been much more subdued.

After falling by over a fifth from February to April, euro-zone sales rebounded by nearly 18% m/m in May. In Germany, where the government lifted its lighter-touch lockdown sooner, sales were actually above the pre-crisis level in May.

The national data for June point to another big gain at the euro-zone level. That said, in France and Spain the increases were smaller than in May. And sales in Germany dropped back slightly on the month, suggesting that the strength of sales in May was partly just a release of pent-up demand rather than a sign that things would continue to get better.

We think that euro-zone sales rose by about 6% m/m (see Chart 3), leaving them down by about 2% since February. While that would be a very quick recovery from the lows of the crisis, other categories of spending are likely to have risen much more slowly.

Chart 3: Retail Sales (% m/m)

Sources: Refinitiv, Capital Economics

German Industrial Production (June) Fri. 7th Aug.

Forecasts

Time (GMT)

Previous

Median

Capital Economics

Industrial Production m/m (y/y)

07.00

+7.8%(-19.4%)

+8.0%(-15.3%)

+6.0%(-16.9%)

Continued recovery

We think that industrial output probably increased by around 6% in June, which would be a slightly smaller increase than that which occurred in May.

Production recovered by 7.8% in May, following the spectacular slumps of 8.9% m/m and 17.9% m/m in the two previous months respectively. This recovery resulted from the lifting of lockdown measures early in the month.

Business surveys such as the manufacturing component of the Ifo Business Climate Index have bounced back from their lows but are still at a subdued level by past standards. The Manufacturing Output PMI has also rebounded. (See Chart 4.) And the vehicle manufacturers association VDA reported that auto production doubled in June compared to May, to 301,000, although that is sill 20% below its level in June last year.

Beyond June there is scope for some further increase in output, as we suspect that production is recovering more slowly than household spending. But we do not expect output to return to pre-crisis levels in next couple of years, not least because of depressed demand in the rest of Europe.

Chart 4: German Manufacturing Output PMI & Industrial Production

Sources: Refinitiv, Markit

Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time CET

Time (BST)

Previous*

Median*

CE Forecasts*

Mon 3rd

Spa

Markit Manufacturing PMI (Jul)

09.15

(08.15)

49.0

50.0

Ita

Markit Manufacturing PMI (Jul)

09.45

(08.45)

47.5

50.8

EZ

Markit Manufacturing PMI (Jul, Final)

10.00

(09.00)

51.1p

51.1

Tue 4th

Spa

Change in Unemployment (Jul)

09.00

(08.00)

+5,100

EZ

PPI (Jun)

11.00

(10.00)

-0.6%(-5.0%)

Wed 5th

Spa

Markit Composite PMI (Jul)

09.15

(08.15)

49.7

51.5

Ita

Markit Composite PMI (Jul)

09.45

(08.45)

47.6

52.5

Fra

Markit Composite PMI (Jul, Final)

09.50

(08.50)

57.6p

57.6

Ger

Markit/BME Composite PMI (Jul, Final)

09.55

(08.55)

55.5p

55.5

55.5

EZ

Markit Services PMI (Jul, Final)

10.00

(09.00)

55.1p

55.1

EZ

Markit Composite PMI (Jul, Final)

10.00

(09.00)

54.8p

54.8

EZ

Retail Sales (Jun)

10.00

(09.00)

+17.8%(-5.1%)

+8.4%(+0.4%)

+6.0%(-0.5%)

Thu 6th

Net

CPI (Jul, EU Harm.)

06.30

(05.30)

+0.5%(+1.7%)

Ger

Factory Orders (Jun)

08.00

(07.00)

+10.4%(-29.3%)

+12.3%

Ita

Industrial Production (Jun)

10.00

(09.00)

+42.1%(-20.3%)

Fri 7th

Ger

Industrial Production (Jun)

08.00

(07.00)

+7.8%(-19.4%)

+8.0%(-15.3%)

+6.0%(-16.9%)

Ger

Trade Balance (Jun, s.a.)

08.00

(07.00)

+€7.1bn

Fra

Industrial Production (Jun)

08.45

(07.45)

+19.6%(-23.4%)

Fra

Trade Balance (Jun, s.a.)

08.45

(07.45)

-€7.1bn

Spa

Industrial Production (Jun)

09.00

(08.00)

+14.7%

Ita

Trade Balance (Jun, n.s.a)

10.00

(09.00)

+€5.6bn

Selected future data releases and events

Tue 11th

Ger

ZEW Economic Sentiment (Aug)

11.00

(10.00)

59.3

Wed 12th

EZ

Industrial Production (Jun)

11.00

(10.00)

+12.4%(-20.9%)

Thu 13th

Ger

CPI (Jul, EU Harm., Final)

08.00

(07.00)

-0.5%(0.0%)

Fri 14th

Net

GDP (Q2, Prov., q/q(y/y))

09.30

(08.30)

-1.5%(-0.2%)

EZ

GDP (Q2, 2nd Est., q/q(y/y))

11.00

(10.00)

-12.1%(-15.0%)p

*m/m(y/y) unless otherwise stated. p=provisional.

Sources: Bloomberg, Capital Economics

Main Economic & Market Forecasts

%q/q(%y/y) unless stated

Latest

Q4 2019

Q1 2020

Q2 2020

Q3 2020

2019

2020

2021

2022

GDP

-12.1(-15.0)

+0.1(+1.0)

-3.6(-3.1)

-12.1(-15.0)

+10.5(-6.4)

+1.2

-7.5

+5.0

+1.5

Household Spending

-4.7(-3.9)

+0.1(+1.3)

-4.7(-3.9)

-12.0(-15.5)

+13.0(-5.0)

+1.3

-7.0

+6.6

+1.7

HICP (%y/y)

+0.4 (Jul)

+1.0

+1.1

+0.2

+0.3

+1.2

+0.4

+0.7

+1.0

Unemployment Rate (%)

7.8 (Jun)

7.4

7.2

7.4

8.2

7.6

7.8

10.0

9.3

Depo Rate, end period (%)

-0.50

-0.50

-0.50

-0.50

-0.50

-0.50

-0.50

-0.50

-0.50

10 yr. Ger. Bond Yield, end period (%)

-0.56

-0.19

-0.46

-0.46

-0.37

-0.19

-0.25

-0.25

-0.25

$/euro, end period

1.18

1.12

1.08

1.12

1.19

1.12

1.20

1.20

1.20

£/euro, end period

0.90

0.85

0.87

0.91

0.89

0.85

0.89

0.89

0.89

Sources: Bloomberg, Capital Economics


Jack Allen-Reynolds, Senior Europe Economist, jack.allen-reynolds@capitaleconomics.com