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●   No huge second wave: All our economic forecasts rest on one key assumption: the major economies in Europe will avoid a second wave of harsh, widespread and restrictive lockdowns that would cripple economic activity and shatter confidence. Amid a serious rise in new infections across most of Europe and a major surge in Spain (10.4% of Eurozone GDP), we need to constantly reassess this assumption.

●   Still on track for a tick-shaped recovery: In this report, we take a closer look at current COVID-19 trends in Europe and their potential impact. With the possible exception of Spain, the problem remains far less pronounced than in the US. On balance, the data are still consistent with our call for a tick-shaped recovery from the March/April plunge in economic activity caused by the lockdowns.

●   Learning to live with the virus: Since February, scientists, medical staff, citizens and policymakers have learned a lot about COVID-19 and the measures best suited to cope with it. The advanced world seems to be getting better at protecting the vulnerable and treating the infected. Hospitalisation and death rates remain low. Medical systems have significant spare capacity. This raises the chance that the new rise in infections can be contained before it overstretches national health systems to such an extent that countries have to resort to new harsh lockdowns.

●   The recent US experience seems to have two encouraging aspects: First, the huge June/July surge in new infections in the US seems to be receding slowly in response to modest countermeasures and changes in behaviour (Chart 1). Second, these changes have not (yet) derailed the US economic recovery despite negative effects on some sectors. We expect the story to be similar in Europe, with some softening in consumer confidence and demand but not a genuine new downturn in aggregate demand. An ongoing rebound in industry can support growth in coming months.

●   The balance of two risks: A serious worsening of the medical situation followed by a second wave of harsh lockdowns could result in much weaker economic performance in late Q3 and, even more so, in Q4 this year. Conversely, potential medical breakthroughs such as a vaccine by, say, early 2021, could mean a stronger 2021 rebound than we currently project – see Forecasts at a glance.

●   Unusual uncertainty: The outlook depends mostly on a non-economic factor: COVID-19 trends. As economists, we cannot really predict the medical situation. But we can watch the data, observe the political debate about the likely reaction to higher case numbers and draw conclusions from the experience gathered so far, as we do in this report. All forecasts are subject to unusual uncertainty.

Holger Schmieding

Chief Economist

+44 20 3207 7889

holger.schmieding@berenberg.com

Florian Hense

European Economist

+4420 3207 7859

florian.hense@berenberg.com

Disclosures

This material is intended as commentary on political, economic or market conditions for institutional investors or market professionals only and does not constitute a financial analysis or a research report as defined by applicable regulation. See the "Disclaimers" section of this report.

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