Following a partial rebound in economic activity in the third quarter, a second wave of COVID-19 infections (accompanied by renewed restrictions aimed at curbing the outbreak) is derailing Europe’s economic recovery. New nationwide lockdowns are in place in France, Germany and the UK and mobility restrictions have tightened in Italy and Spain. These restrictions aim to curb contagion while inflicting less economic damage than the first wave of undifferentiated closures. Importantly, schools will remain open and manufacturing and construction sectors are largely allowed to continue to operate. However, the worsening health situation (Chart) and reimposed restrictions on hospitality will further dent service sector GDP. Indeed, business activity declined across the Eurozone in October according to the flash purchasing managers’ index, as accelerating manufacturing output—boosted by a rebound in global trade, particularly in exports to China—was overwhelmed by a steepening deterioration in the service sector. After surging 12.6% in the third quarter, the Eurozone economy could contract again in the fourth quarter.
Pfizer’s announcement that their COVID-19 vaccine was 95% effective in preventing the virus in preliminary results has buoyed the 2021 outlook. The EU’s contract to acquire up to 300 million doses consolidates ‘an extremely solid vaccine candidate portfolio’, according to European Commission President Ursula von der Leyen. Further, a contract with Moderna is expected to be finalised soon for a vaccine with preliminary data suggesting 94.5% effectiveness. However, formidable challenges and uncertainties remain regarding vaccine production, distribution, uptake and efficacy. For instance, Pfizer’s vaccine candidate requires ultra-cold storage, creating logistical challenges for many countries. Recurring cycles of accelerating viral spread and tightening restrictions that see an unsteady, stop-start recovery are likely until widespread immunity is achieved, according to ECB President Christine Lagarde. Europe directly accounted for almost 10% of Australia’s exports last year. But the region’s wavering recovery will also weigh on the global economic rebound and broader demand for Australian exports.