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Eurozone GDP expected up nearly 10% in Q3 – Moody’s

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Eurozone GDP is forecast to have expanded 9.9 per cent in the third quarter of this year: This is a remarkable improvement in the face of the pandemic crisis, Moody’s said in a note released on Friday.

A separate indicator, the eurozone IHS Markit October Flash Manufacturing output prices PMI climbed to 50.2 (49.6 SEPT); this is the highest reading since June 2019, and indicates a move from contraction into growth.

“The EU’s economies are rebounding from the lockdown last spring. We expect household and government consumption to have had the most impact on activity,” the credit rating agency commented.

There has also been significant investment during the quarter, Moody’s added.

“Net exports will increase relative to the second quarter, but trade flows remain well below year-ago levels, however.”

Economic sentiment is not rebounding at the same rate, according to the note. “We see business and consumer sentiment darkening in October, with the European Commission’s Economic Sentiment Indicator falling to 87 from 91.1. The pandemic will be the major factor dashing sentiment, as already attested by other surveys, such as this week’s GfK consumer climate index in Germany,” the note said.

“A chief concern is that targeted social-distancing measures evolve into stricter lockdowns, as was the case in Ireland and the Czech Republic this past week.”

Moody’s expects that retail sales have likely slowed in September from August’s boost. “August benefited from later-than-usual summer sales, so September should see negative base effects from sales coming to an end. Consumer confidence wasn’t so robust in September either, meaning households were more likely to reverse course once sales ended.”

As a result, Moody’s forecasts that Spanish retail sales fell 2.5 per cent m/m in September, German sales rose by just 0.5 per cent, and French household consumption slid 0.5 per cent.

But the flash IHS-Markit Composite PMI for the Eurozone gave a negative note: It dropped from 50.4 in September to 49.4 in October. Readings below 50 indicate a slowing economy.

“Germany continued with a steady recovery on the back of its mighty manufacturing sector whose output grew at a rate surpassed only twice in the survey’s nearly 25-year history. Service sector activity fell for the first time since June in the country. In the bloc’s second-largest economy, France, the economic deterioration sped up with Composite PMI falling deeper in contraction territory to 47.3. from 48.5 in September.,” the IHS Markit report said.

Unemployment is still on the rise across Europe, according to the note.

“After the German unemployment rate slid to 6.3 per cent in September, we think it increased again in October to 6.4 per cent. The fundamentals necessary for job growth are missing, and the conditions for layoffs persist; they’ve only worsened since September as the new wave of COVID-19 hits Europe,” Moody’s says.

Similarly, we expect unemployment rose to 18.9 per cent in the third quarter in Spain, October’s unemployment rate in Italy rose to 10.1 per cent, and the number of French job seekers in October held constant.

Consumer prices are still falling however, despite the efforts of the European Central Bank to boost inflation. “We think the consumer price level fell 0.2 per cent y/y in October. The headline rate is being weighed down by consistently low oil prices, while the core basket (inflation measured without food or energy prices) is suffering from weak demand. National temporary VAT cuts are also putting downward pressure on prices, but because most of these cuts will end next year, we think we’ll see a return to price growth, albeit very weak, sometime in the first quarter of 2021.”

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