Special Commentary: Eroding Eurozone economic confidence

Executive summary

Following a slump in the Eurozone economy in H1-2020, activity data and confidence surveys during the late spring and over the summer showed a relatively quick initial rebound. While policy fundamentals still appear supportive for growth, a renewed increase in COVID-19 cases and a softening in recent data have raised some concerns. We still expect a firmer Eurozone economy and currency over time, but recent data clearly suggest risks around our outlook are tilted to the downside.

Eurozone manufacturing holds up, but service sector stumbles

The COVID-19 outbreak and associated lockdown measures took a severe toll on the Eurozone economy in early 2020 as GDP slumped 15% in the first half of the year. However, since spring we have become increasingly more hopeful on Eurozone economic prospects given the actions of monetary and fiscal policymakers, and as activity data and confidence surveys have shown a relatively quick initial rebound from the deep downturn.

However, that more hopeful outlook has faced some questions in recent weeks. Retail sales unexpectedly declined in July, while the August services PMI dipped sharply to 50.5. Meanwhile, after the spread of COVID-19 slowed across the Eurozone during the summer months, the daily increase in new cases has jumped again as we enter the fall and is now above the peak seen in March/April (Figure 1). The rise in cases has raised concerns that at least the partial re-imposition of lockdown restrictions could restrain the rebound and lead to a disappointing pace of recovery.

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