While Europe is experiencing a second wave of covid-19 infections, many are wondering whether the rebound the European economy enjoyed after easing the severe confinement measures taken during spring, will persist. As a matter of fact, although the EU’s real GDP collapsed and dropped by a severe 11.4% in the second quarter of 2020, high-frequency indicators suggested that in large economies of the region the bottom had been reached in April or May.

Western European manufacturing sector shows resilience

In Western Europe, the recovery actually already started to lose steam during summer with the resurgence of contaminations taking its toll on the tourism, travel and hospitality sectors. On the other hand, the manufacturing sector seems to continue to recover somehow up to now, helped by the confirmed revival of the manufacturing sector in China, feeding exports. In annual terms, the IMF recently forecasted a partial recovery as from next year (5.2% and 5.9% of real GDP growth for 2021 in the euro area and the UK respectively, after an estimated drop by 8.3% and 9.8% this year). However, this scenario remains subject to very large uncertainty, in particular regarding the timing of the broad administration of a vaccine and the impact of the containment measures recently imposed and aiming at curbing the second wave in various countries. A return to negative GDP growth in the fourth quarter of this year is not excluded in these countries. In the UK and its most important trading partners in the region (such as Ireland, the Netherlands and Belgium), the impact of a no-deal Brexit – which becomes more and more likely as the 31 December deadline for negotiations is coming closer – would add a drag on the activity, with increased trading costs and administrative burden for the companies.

Polish activity contracting less than regional peers’

In Central Europe, the recovery in economic activities is confirmed by a strengthening labour market, a purchasing managers index (PMI) which returns to above 50 in Poland and the Czech Republic, and industrial production recovering little by little – although not yet at pre-pandemic level. However, the nascent recovery could be threatened by the recent resurgence of covid-19 infections – notably in the Czech Republic, Poland, Hungary and Slovakia, where the daily new cases increased significantly from the beginning of September to the end of October. In this context, the real 2020 GDP growth is also expected to be negative and subject to severe uncertainty in the near term. There are significant differences between countries: the contraction in Poland (-3.6%) – which has the most diversified export markets and is less dependent on the automotive industry – is expected to be less severe than its for regional peers like Hungary (-6.1%), Czech Republic (-6.5%) and Slovakia (-7.5%). The moderate level of public, household and non-financial companies’ debt prior to the crisis helped absorb part of the shock in those countries. In addition to the risk related to covid-19, other risks arise from the premature withdrawal of support policies, international trade tensions and the impact of a hard Brexit.