European shoppers hit the high street but exports drag on growth

Europe’s shoppers have returned to the high street but the continent’s exporters are still suffering, according to data published over the past week which suggests that the recovery from the unprecedented economic crash caused by coronavirus will be patchy.

The past week “brought further evidence that the early stages of the eurozone’s economic recovery looked remarkably V-shaped”, said Jack Allen-Reynolds, senior Europe economist at Capital Economics. “Restrictions have been lifted faster and spending has recovered more quickly than we anticipated,” he added.

However, economists warn that the improvement could be quickly reversed if there is a second wave of infection — fresh localised lockdowns in the past week illustrated the threat — and the initial bounceback may not be sustained in the longer term.

The figures offer an early glimpse into how Europe’s emergence from lockdown is playing out, and will inform discussion among policymakers at the European Central Bank at their monetary policy meeting later this week.

Consumers have returned

Retail sales volumes expanded by 18 per cent month on month in May as outlets reopened and consumers proved willing to put to work some of the savings they had accumulated during lockdown.

The rebound in sales was larger than expected and brought spending back to near last year’s levels.

“So far, the strongest numbers are from the consumer sector, as households seem eager to spend part of [their] additional savings as quarantines were lifted,” said Angel Talavera, senior European economist at Oxford Economics.

Line chart of Volume index, rebased showing European retail sales rebound

Retail spending is a small part of total household expenditure, which also includes entertainment, education, health and housing, yet economists generally regard it as a reliable measure of households’ financial wellbeing.

“The quick bounceback illustrates that household incomes have been supported enough to fuel a quick recovery as businesses reopen,” said Bert Colijn, senior economist, at ING.

But the initial spending spree could wane in the near future if workers lose their jobs or the catch-up effect from the lockdown diminishes.

Industry lags behind

Industrial production has also risen from lockdown lows, but the recovery has not been enough to compensate for the unprecedented plunge in April.

In May, output was still about 20 per cent below last year’s level across the eurozone’s largest economies.

Line chart of Indices, rebased showing Industrial production rebounds in Europe but remains pre-virus levels

Exporters face a challenge

Christine Lagarde, ECB president, last week told the Financial Times that export-dependent nations would have to “revisit” their business models because of the lasting impact of the pandemic on global trade — an argument backed up by recent data.

Exports rebounded month on month in May but remain well below pre-virus levels. In Germany and France, the value of goods exported in May was between 35 and 40 per cent below the same month last year.

This partially reflects the fact that some of Europe’s major trade partners, such as the UK and the US, still had lockdowns in place.

Line chart of Indices, rebased showing Exports remain depressed despite rebound

German exports to the UK plunged by nearly 50 per cent year on year, double the pace of the contraction in German exports to other eurozone countries, and far more than the 12 per cent fall in its exports to China.

As a result, economists must wait for June’s data to see how well European exporters managed to recover once lockdowns in other parts of the world were lifted.

“We expect the June data to confirm . . . an ongoing recovery from a low base in manufacturing output and exports,” said Holger Schmieding, chief economist at the financial company Berenberg. 

Southern Europe struggles

The biggest issue for the ECB this week is likely to be the economic divergence among eurozone member states, economists say.

Germany and other northern countries are closer to pre-virus levels of economic activity than France, Italy and Spain across all available data measures.

Line chart of Real GDP, rebased showing The pandemic is set to widen countries' differences

German retail sales spending exceeded last year’s levels in May, while high-frequency data indicators, which are more timely than official statistics although their reliability is variable, suggest that attendance is reaching normal levels at retail and entertainment hubs.

By contrast, countries which experienced a larger number of virus cases, and those which rely heavily on tourism, are still struggling to recover. Italy and Spain are both in this category.

This was reflected in last week’s economic forecasts by the European Commission in which GDP growth forecasts were revised slightly up for Germany but down for France, Italy and Spain.

Germany is “on the one end of the spectrum” of the economic downturn, while “on the other end there are Italy and Spain”, said Katharina Utermöhl, senior economist at Allianz.

She added that Brussels’ proposed €750bn recovery fund and the expansion of the ECB’s pandemic emergency programme “should provide a boost to the economic recovery and keep a lid on eurozone divergence — albeit not eliminate it”.

Column chart of By date of forecast, annual % change showing The European Commission revised down its 2020 growth forecasts for Italy, Spain and France

The divergence could be exacerbated by variations in the level and type of government support on offer to businesses and households across eurozone member states, and the pre-existing economic divergence which has seen southern European states struggle to grow since the financial crisis.

Marchel Alexandrovich, senior European economist at the financial company Jefferies, said that there may be room for “some cautious optimism” across the eurozone, given that the bloc “is emerging from the lockdown more energetically than had been expected”.

But the focus in coming weeks is likely to shift to the divergence in countries’ performance, he warned: “Some euro area countries will likely significantly underperform others.” 

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