Double-Dip Recession Risks Becoming Base Case For Europe As Virus Spreads Anew

About that European recovery.

It’s in serious doubt. And there’s no mystery around why.

As you’re probably apprised, Europe is dealing with a serious second wave of the virus, and that’s forcing the region’s largest economies to implement various containment protocols. Even if most politicians are loath to return to anything that can be described as a “lockdown,” the situation is becoming quite acute.

Read more: As Spain, France Top 1 Million Virus Cases, Half Of European SMEs May Be Gone In 12 Months

Eventually, this will weigh on the services sector, even if manufacturing manages to hold up.

On Friday, the market got flash PMIs for the region and sure enough, Europe is on the brink of contraction. The composite gauge printed 49.4, below the 50 demarcation line.

The divergence between services and manufacturing is glaring. It’s a two-speed recovery, and if services shifts down another gear or two, it won’t be a “recovery” at all.

“The eurozone is at increased risk of falling into a double-dip downturn as a second wave of virus infections led to a renewed fall in business activity in October,” IHS Markit’s Chris Williamson said Friday. “The survey revealed a tale of two economies, with manufacturers enjoying the fastest growth since early-2018 as orders surged higher amid rising global demand, but intensifying COVID-19 restrictions took an increasing toll on the services sector, led by weakening demand in the hard-hit hospitality industry.”

A look at the country-specific gauges shows a similar disparity. Germany’s manufacturing PMI printed a blistering 58, but the services gauge dropped to 48.9. In France, it’s even worse.

“Manufacturing businesses have been able to continue operating with less disruption from any new restrictions than many of their service sector counterparts, whilst at the same time reaping the benefits of a resurgence in global goods trade,” IHS Markit’s Phil Smith said of the situation in Germany.

The color that accompanies the French release for October is considerably downbeat. “The latest release of PMI data delivers more disappointing news for French businesses. The results suggest that the recent rise in COVID-19 cases and subsequent tightening of restrictions has had a notable negative impact on business conditions,” economist Eliot Kerr remarked. “The rate of private sector output contraction accelerated in October, with service providers posting another marked reduction”.

I realize this is terribly dry, but the read-through is anything but: Europe may be headed for a double-dip recession at some point.

ING underscored that in a quick take on France. “The curfew introduced between 9pm and 6am in a large part of the country (covering 70% of the French population), has a strong impact on the service sector,” the bank’s Charlotte de Montpellier said Friday, adding that “due to the curfew, the restaurant and catering sectors, as well as the arts and entertainment sectors, are obliged to close at the time of day when they generate the largest share of their turnover”.

That’s not great. As de Montpellier goes on to caution, “the current restrictions [could] have a direct impact on GDP growth in the fourth quarter in the range of -0.6 to -1%.”

And that’s not even counting any drag on demand from consumers taking a more cautious approach considering the rapid spread of the virus, and firms quite possibly delaying decisions on investment (i.e., business spending) until there’s more clarity.

As discussed here Thursday in the linked piece above, a McKinsey survey of more than 2,200 SMEs in France, Germany, Italy, Spain, and the UK, found that “more than half” feared for their survival beyond 12 months. That survey was conducted in August. You can assume sentiment has not materially improved since.