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â A greyer winter than usual: The COVID-19 pandemic casts a dark shadow over the near-term outlook for economies in Europe and beyond. Although the second wave of infections seems to have peaked in parts of the European continent, governments may ease restrictions only slowly in December. If too many people celebrate too much together during the Christmas season, a resurgence of infections could lead to tighter restrictions again in January.

â The second wave is different: So far, the economic damage looks set to be much smaller than it was in March and April. The second wave of infections has come as less of a confidence-shattering shock, restrictions are mostly more targeted, factories are open and supply chains are not interrupted. While global trade tanked during the first wave, solid export demand from the US and China is now supporting the heavily trade-dependent economies of Europe. But for how long can manufacturing hold up if parts of the services sector are closed or constrained by restrictions, while consumers are asked to stay at home more – or choose to do so?

â Manufacturing momentum: Germany is the undisputed hub of continental European manufacturing. With its heavy reliance on goods exports and its comparatively competent management of the pandemic, it may be an extreme example. But it does illustrate the momentum that had built up in manufacturing on the European continent just ahead of the second wave of the pandemic. This can help to cushion the Eurozone against the new blow.

â Catch-up potential for output: In the rebound from the COVID-19 recession, the production of goods has so far lagged far behind the sale of goods to consumers at home. As in the US, factories and shops have reduced inventories. In Germany, retail sales in Q3 rose by 4.5% above their Q1 starting level. However, German manufacturers sold 4.7% fewer consumer goods at home than they had early in the year. The strong surge in the sales-to-inventory ratio in the Ifo instituteâs survey of manufacturing points in the same direction. German manufacturers can now cover 6.4 months of production with their stock of orders, well above the 2019 average of 5.7 months – see chart. A need to replenish inventories will support production even if some consumers may spend a little less this festive season than usual.

â A much brighter spring: We expect Eurozone GDP to contract by 3% qoq in Q4. Germany may get by with stagnation as it has not closed its non-essential shops and benefits from its manufacturing prowess in the current services-led downturn. In countries with harsher lockdowns, activity will likely contract, probably by 5% in France and 5.4% qoq in the UK. However, the Eurozoneâs rapid snapback from the first wave, with a 12.6% qoq gain in GDP in Q3 that erased almost the entire Q2 plunge, suggests that the economy can and will recover fast once restrictions are eased again. After a still soggy start to 2021, we look for a major bounce in the spring when seasonal factors will help to contain the spread of the virus. If vaccines were to become so widely available in Q1 that they made a material difference to consumer and business confidence and spending, the rebound could even start well before spring. European fundamentals are positive.

Holger Schmieding

Chief Economist

+44 20 3207 7889

holger.schmieding@berenberg.com

Kallum Pickering

Senior Economist

+44 20 3465 2672

kallum.pickering@berenberg.com

Florian Hense

European Economist

+4420 3207 7859

florian.hense@berenberg.com

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