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â The tick-shape: Since late March, we have predicted a tick-shaped path for the COVID-19 recession and the subsequent recovery. After an unprecedented plunge in economic activity during the lockdown phase, economies would initially rebound fast – but not quite in a V-shaped pattern – as supply is being switched on again. Over time, the pace of the recovery would then flatten notably as household spending and business investment would remain cautious for a while.
â Modest surprises only: So far, the data for the advanced world have sprung only four modest surprises relative to our late-March calls: i) economic activity hit a trough in April that was slightly worse than expected; ii) retail sales then rebounded faster than projected in May and June; iii) by and large, labour markets on both sides of the Atlantic are holding up a bit better than feared; and iv) with a 20.4% qoq drop in Q2, UK GDP has fallen more than expected. While these surprises have led us to reduce our GDP calls for the UK significantly and fine-tune the projections for the US and the Eurozone modestly, they have not caused us to revise our big-picture outlook. The hard data and the forward-looking survey data seem to be consistent with the tick-shaped profile that we continue to project.
â The big fat Q3 base effect: Every quarter that does not contain a lockdown month like April will inevitably be significantly less dismal than Q2 2020. The base effect can be quite strong for Q3. The UK publishes monthly GDP data. If UK GDP throughout Q3 stayed simply at its June 2020 level, it would still be up 6.4% on the Q2 average. In the US, total hours worked in the non-farm sector in June exceeded the Q2 average by 4.1% after a 12.5% qoq drop in Q2. Roughly speaking, the base effect alone means that Q3 GDP would erase almost 30% of the Q2 loss in the US and the UK before adding the actual gains in Q3 relative to the June level. For France, the effect will be even stronger. Judging by the Banque de Franceâs monthly activity data, which tend to be close proxies for real GDP, the base effect alone could lift French Q3 GDP c10% above the Q2 average after a 13.8% qoq drop in Q2.
â More growth over the summer: For July, the Banque de France data (up two points from -9% in June to -7% below normal activity) and US hours worked (+1% on June) show further progress well beyond the June level. Most survey data project additional modest gains to come. In the UK, which had eased its lockdowns later, the ongoing switching on of supply should make for a significant further gain in monthly GDP in July of up to 5% mom. The data are consistent with our call that the UK and the Eurozone can recover almost 60% of the Q2 loss in Q3. The US, which had suffered less in Q2 and has seen a bigger increase in new infections recently than Europe, may recoup half the Q2 drop in Q3.
â Flatter profile to come: The pace of the rebound looks set to flatten a lot after Q3. Economies will likely reach their pre-COVID-19 level of GDP only in Q2 2022 in the US, Q3 2022 in the Eurozone and Q1 2023 in post-Brexit UK. Near term, the current surge in new infections will weigh on tourism, entertainment and some other consumer services until the pandemic is under firmer control again. Fortunately, a strengthening outlook for manufacturing, as suggested by survey data and the 8.1% yoy rise in Eurozone exports to China in June, can help economies to weather this setback for a while.
Chief Economist
+44 20 3207 7889
holger.schmieding@berenberg.com
Senior Economist
+44 20 3465 2672
kallum.pickering@berenberg.com
European Economist
+4420 3207 7859
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