Rising Covid threatens Europe’s economic recovery

Hitherto, The new wave of Covid-19 has had only a limited impact on business in the 19 countries that use the euro. The IHS Markit Purchasing Managers’ Index, a key gauge of the economy, rose in November after falling to a six-month low in October, according to data released Tuesday.

But expectations for the future are darkening. Austria announced last week that it go back to country lock. The spike in infections in Germany has also raised questions about whether the region’s largest economy can re-impose sweeping restrictions.

“Business activity expanded stronger in November despite economists’ expectations of a slowdown, but is unlikely to stop the eurozone from experiencing slower growth in the fourth quarter, especially as Rising virus cases look likely to cause new disruptions to the economy in December,” said Chris Williamson, chief business economist for IHS Markit.

Consumer confidence in the euro area fell “significantly” in November, according to the European Commission. IHS Markit reported that companies’ expectations this month for future economic output “have fallen to their lowest level since January.”

More data is needed to gauge what restrictions in Europe could mean for the region’s economy, said Ruben Segura-Cayuela, Europe economist at Bank of America. He noted that with each wave of Covid-19 infections, the economic impact has subsided as businesses and consumers learn to cope.

“We know there’s going to be a reaction, we just don’t know if it’s going to happen to the same extent,” he said. “I would assume, based on what we’ve seen over the last few months, it’s going to be smaller.”

Europe has been particularly hard hit by the 2020 pandemic. Economic output fell 6.3% in the euro area compared with a 3.4% decline in the United States.

But the region has recovered in recent months as vaccination rates have skyrocketed. Gross domestic product in the euro area grew 2.2% in the July-September period from the previous quarter.

Much depends on how the situation plays out in Germany, said Jessica Hinds, Europe economist at Capital Economics. She said it was “logical” that Europe could stagnate at the end of the year if its largest economy were to come to a standstill.

“We are likely to see some impact on economic activity as an increase in the number of cases makes consumers more fearful and governments more stringent Covid clearance requirements. [screening] for different activities,” Hinds said.

Starting Wednesday, German employees must present a negative Covid test, their immunization status or proof of recovery from the virus in order to work. If they cannot work from home, they may not be paid. And from Saturday, Berlin will ban the unvaccinated from hotels, restaurants, bars and shops, with the exception of grocery stores and pharmacies.

German inflation hits 29-year high as energy costs spike across Europe

The German manufacturing sector is also under pressure as supply chain problems continue to affect carmakers and other manufacturers.

In addition to coronavirus cases, Europe is dealing with the effects of a economic recession in China, as well as rising inflation and provide energy crunch that can increase costs for businesses and make indoor heating more expensive this winter. That could affect consumer spending more broadly.

Segura-Cayuela says some of the positive elements of the recovery are still at play. For example, excess savings accumulated earlier during the pandemic is helping to mitigate the harmful effects of inflation on people’s incomes.

“There are still forces that reopen to help growth in the near term,” he said.


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