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Jump in Covid infections pounds eurozone consumer activity

Rising Covid infections, a new coronavirus variant and the reimposition of pandemic restrictions are threatening the eurozone’s economic rebound, with fewer people going out to shop, eat at restaurants and visit cinemas, high frequency data show.

The slowdown creates a further challenge for the European Central Bank, which must also deal with rising inflation that hit a record 4.9 per cent in November, its highest since the single currency was created over two decades ago.

Although the eurozone notched up strong growth in the three months to September, thanks largely to a burst of consumer spending, high frequency indicators that track restaurant bookings, cinema ticket sales and other measures of mobility suggest the rebound lost momentum in November.

“Mobility in the eurozone started to slow down even before governments announced new Covid restrictions,” said Bert Colijn, economist at ING.

Austria entered its fourth Covid lockdown on November 22, while other countries ranging from the Netherlands and Belgium to Germany, Ireland, Slovakia, Italy and the Czech Republic also stepped up their efforts to curb steep rises in infections.

The threat of the Omicron variant has also led to calls for a renewed lockdown in Germany, after the national academy of sciences published a paper advising Berlin to introduce restrictions on public and private gatherings, including for the vaccinated.

Line chart of  Pandemic government response stringency Index 100=tightest showing Countries are tightening restrictions

However even in countries such as Spain, where the health situation has remained more stable, measures of consumer spending have softened as well.

Across the eurozone, visits to shops, bars, restaurants and entertainment centres declined sharply in November, according to Google mobility data which shows a fall in the use of public transport and more time spent at home.

The eurozone recovery indicator, a measure of activity published by Oxford Economics, also fell to its lowest level since June, while the OECD’s weekly economic tracker, which is based on keyword searches for terms related to spending behaviour and the labour market, turned negative in many eurozone countries.

One startling piece of data shows German restaurant bookings dropping below their November 2019 levels.

Column chart of % change compared with the same day of the week in 2019 showing German restaurant bookings have fallen

Encouragingly, economic activity has not yet fallen as much as in past periods of high infections.

“This suggests that precautionary measures or voluntary changes in behaviour are still mild and that the fear of the virus is not yet very strong,” ING’s Colijn said.

Moreover, while virus-sensitive sectors such as hospitality may have been hit, “this has by and large not, yet, spilled over to the rest of the economy”, said Silvia Ardagna, economist at Barclays.

Even so, cinema revenues across the eurozone’s largest economies dropped around 20 per cent in the third weekend of November compared with the previous week, according to Box Office Mojo, which tracks box-office revenue.

Hotel bookings also fell sharply, data from travel consultancy Sojern shows, reversing a steady improvement through the autumn. Flight numbers saw a similar fall in November after months of recovery.

Line chart of Rolling seven-day average, % change compared with same period in 2019 showing Flights number are down again

Although the economic impact of pandemic restrictions has been less than in previous waves of infection, Ana Boata, economist at Euler Hermes, nevertheless forecasts that eurozone economic growth will slow to 0.6 per cent in the final quarter of the year from 2.2 per cent in the third quarter.

“But it’s not negative growth,” she said, rather “a delayed recovery”.

“The labour market is recovering quite strongly and there are high backlogs of work,” Boata added. “It’s a matter of time” before growth returns after the restrictions are lifted.

Still, the tension between slowing economic growth caused by tighter Covid restrictions and Omicron’s potential threat, versus rising inflation caused by supply and labour shortages, creates a difficult mix of challenges for the ECB.

“If Omicron turns out to be malign enough to prompt tighter restrictions, we suspect that the net result would initially be for inflation to be lower,” Capital Economics’ Simon MacAdam wrote to clients on Wednesday. “But by worsening . . . shortages, restrictions on household activity could end up keeping inflation above targets for longer,” he added.

Jay Powell, chair of the US Federal Reserve this week signalled his support for a quicker withdrawal of the Fed’s huge asset purchase programme. But “other central banks could be in wait-and-see mode”, Boata said.

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