In order to contain the second wave of the COVID-19 pandemic, most European countries have implemented new lock-downs starting from Mid-October. As the Chart of the Week with data extracted from Google Mobility shows, the new “soft lockdowns” were overall significantly softer than the “hard lockdowns” implemented to contain the first wave of the pandemic, earlier this year in H1 2020. This should translate in much milder GDP contractions in Q4 2020 in contrast to the deep dive witnessed in Q2 2020, when economic activity was almost brought to a standstill in a large number of sectors. Among the six largest European countries, there are however marked differences from one country to the other as for the impact of the newly imposed restrictions on time spent at the office (“workplace”), time spent in public transportation (“transit”) and visits to retail and recreation facilities (“retail”). The restrictions and their impact have been much milder in Germany than in France or in the UK which have witnessed a sharp contraction in the “retail” and “transit” indicators.
In order to estimate the impact of the soft lockdowns on the economy these figures should go through different adjustments.
A first adjustment is needed to account for the growing share of people which are getting used to work at home – a structural tendency that should be felt even after the end of the pandemic and which will continue to exercise a downward pressure on rental prices and occupancy rates of offices in the major metropolitan cities. The second adjustment that has to be made is related to the shift from offline to online retail. The latest figures on retail sales in the Euro Area show that while the recovery of retail is lacklustre from its deep dive in March-April, the turnover of online retail in September was still +17.4% above its level achieved in September 2019. This gives another reason to think that the overall economic impact will be much milder this time around all the more so as there was a front-loading of retail sales in October in some countries as the consumers anticipated the lockdowns. In France for example, the Banque de France figures show that “In October, turnover in retail trade rose by 6.0 % year-on-year (adjusted for seasonal and working-day variations) after rising by 3.3% in September. The strong upward trend was observed in both food (+5.3 %) and industrial goods (+6.2 %). The biggest rises were in consumer electronics (+16.6 %), DIY (+23.8 %) and games and toys (+46.6 %), as households probably opted to do some of their Christmas shopping early in anticipation of a second lockdown. In contrast, sales of perfumes/personal care products and footwear both declined (-7.6 % and -3.7 % respectively).” As for industrial production, it should remain relatively unaffected by the soft lockdowns. All in all, the lockdowns 2.0 will certainly delay the economic recovery from the pandemic but they should not derail it. Q4 GDP for the Euro Area could even surprise to the upside provided exports continue to recover. The real test for the recovery will be in 2021 when the supply shock could morph into a potential long lasting demand shock – the so-called scarring effect. But we are not there yet.
