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â Winter wave hurts Europe: The winter wave of the Sars-CoV-2 pandemic – driven partly by more contagious virus strains – has interrupted the rebound of the major European economies from the mega-recession of spring 2020. While the US looks set to register another quarter of solid growth at the start of 2021 of c1.2% qoq after 1% in Q4, European economies are not getting away lightly. Amid tighter containment measures than in most of the US, Europe is suffering a double-dip recession. The provision of and demand for close-contact consumer services have retreated significantly again amid stay-at-home orders and closures of businesses such as pubs, restaurants, hotels and entertainment venues. After -0.7% qoq in Q4, Eurozone GDP may fall by another 2% in Q1. Following a likely stagnation in the last quarter of 2020, the UK economy could contract by 1.5% in Q1.

â Smaller hit: Compared to the collapse in economic activity during the first wave, the current wave has hit Europe significantly less badly. The current wave has been less of a nasty surprise; factories remain open and many households and companies have adapted their behaviour to restrictions – think online shopping, takeaway food and working-from-home. In addition, vaccinations raise hopes for a strong rebound from Q2 onwards.

â Industry limits the damage: Confidence, production and consumption have held up much better than nine months ago in Europe also thanks to sustained gains in industry. Buoyant China and a resilient US economy maintain solid demand for European exports. At the same time, international supply chains are not interrupted on a large scale, even though serious capacity constraints have driven up transport costs significantly.

â December setback in orders is not a precursor for change in fortune: German factory orders – a bellwether for the European business cycle – fell by 1.9% in December relative to the previous month. German manufacturers faced fewer orders from Eurozone customers and for capital goods than in November when orders were exceptionally strong. A semiconductor shortage and an end to the VAT rebate for German cars from January onwards may have played a role. The buoyant manufacturing sector will noticeably limit the damage from close-contact consumer services. German production (to be published on 8 February) could rise by 1% mom in December.

â Three reasons for sustained gains in industry: 1) The December correction in German factory orders comes on the back of strong growth in the previous months. In Q4, German factory orders were 7% higher than in Q3. Even relative to Q4 2019, they were up by 5.2% driven by non-Eurozone orders and strong demand for consumer goods. 2) Production has significant catch-up potential. While factory orders have recovered their pandemic losses, exceeding their pre-pandemic peak of January 2020 by 1.4% in December, German industrial production is still 4.5% below its February 2020 level. As orders outpaced production, the backlog of orders rose further in October/November versus Q3 by 2.9%. Industrial turnover, which closely matches production, increased by 1.8% mom in December. 3) Demand should remain strong for two reasons. Firstly, inventories remain low. According to an Ifo survey, they are at levels last seen in 2018. Secondly, the prospects for a strong rebound in demand from spring 2021 onwards as restrictions are eased raise investment and therefore demand for intermediate and capital goods.

Florian Hense

Senior European Economist

+4420 3207 7859

florian.hense@berenberg.com

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