LONDON (ICIS)--Despite the International Monetary Fund (IMF) asserting this week that investors and consumers’ faltering confidence may be premature given a better-than-expected outlook, the pandemic’s second wave is hitting Europe hard.
The expected economic bounce back in the second half of the year, in turn, is losing steam and the latest indicators are showing rising infections across Europe are already denting the recovery.
The fears about yet more economic pain to come were reflected this week in European stock markets, which opened on Monday with heavy losses and also closed on Friday in the red.
IMF: LONE OPTIMISTIC
The IMF this week issued what could be considered an upgrade of sorts, arguing global growth could turn out to be “less dire” than expected in June.
“Upcoming data suggests the outlook may be somewhat less dire than at the time of the WEO [World Economic Outlook, published] on 24 June,” said IMF communications director Gerry Rice, speaking at a press briefing.
“Some parts of the global economy are starting to turn the corner… as activity began to improve out of those stringent lockdowns and also seeing signs of global trade beginning to recover,” added Rice this week.
Although he emphasised the world’s economy is “not out of the woods” and the outlook remains difficult, especially for emerging economies; those economies fuelled global growth following the 2008-2009 financial crisis.
EUROPE ACTIVITY STALLING
This week’s positive commentary from the IMF, however, clashed with economic indicators in Europe pointing again to a slowdown in activity.
The much-followed flash reading of the PMI index, measuring activity in both services and manufacturing, showed industry in the 19-country currency union still booming following months of practically nil activity due to the lockdowns.
But manufacturing is not the main sector in most European countries; Germany’s export-oriented economy still makes 20% of its output from industrial activities, but the figure is sharply lower in other major countries like France, Italy, or Spain (between 10-15%).
In the UK, recently imposed restrictions are also set to sharply lower economic activity, according to analysts; office workers across the country are now advised to work from home if possible, slowing down the much-needed rebound in other services sectors like retail and hospitality.
In both the UK and the eurozone it is services that tell the full story about the health of the economy – and things are looking indeed dire.
Across the 19 eurozone members, services fell back intro contraction territory (at 47.6 points, a four-month low), a sign that rising infections in the first weeks of September are already denting activity.
Any reading below 50.0 points shows economic activity contracting; thanks to a good run in manufacturing (53.7 points) as global trade in goods picks up, the composite PMI measuring overall activity managed to just-about stay in expansion territory at 50.1 points.
“This [negative services PMI] supports our view that the consumer recovery is set to plateau, or even go into reverse, as rising virus cases, mounting job losses and uncertainty about the months ahead curtail spending,” said analysts at Oxford Economics this week.
“It clearly highlights that the path of the virus itself will be a key factor determining the strength of the economic recovery over the coming months.”
Confidence has always been described as the least tangible economic asset; individual consumers’ spending patterns are always hard to predict, and more so amid a pandemic.
Analysts at ING bank summed it up: “This confirms that human behaviour related to the fear of the virus is an important factor determining economic activity, which is relevant for activity in the months ahead.”
If stock markets are a measure of confidence, this week showed it is running low; the falls between 3% and 4% posted on Monday were the prologue for a week in which markets closed most days in the red.
On Friday, the Stoxx 600 index, with 30 large chemicals listed companies, was down over 1% approaching the session’s closing, with major names like Evonik (-2.2%), BASF (-1.40%), AkzoNobel (-1.34%) or Arkema (-1.45%) posting falls.
Among major stock exchanges, only London’s FTSE 100 was in the positive, at 0.10%, with Frankfurt’s DAX (-1.47%) or Paris’ CAC 40 (-1.21%) also down.
Crude futures for delivery in November were keeping afloat over the $40/bbl mark in European afternoon trading, but this happens against a backdrop of producing countries – OPEC+ – fruitless efforts to prop up prices after months of output cuts.
With demand for crude set to end 2020 at levels last recorded in 2013, according to the International Energy Agency (IEA) earlier this month, the market continues to be in the doldrums.
In petrochemicals, European methanol prices on Friday brought a positive as fourth-quarter contracts settled up by €38/tonne to €263/tonne FOB (free on board) Rotterdam, the first increase since 2018 and near pre-pandemic levels.
Butadiene (BD), another key chemical for downstream industries, also settled up this week with October contracts at €450/tonne FD (free delivered) northwest Europe (NWE), up by €40/tonne from September.
BD prices, however, still remain far from pre-pandemic levels.
The health emergency, without signs of abating for now, is set to dampen expectations for months to come.
“The impact of second wave-related weakness does lead us to think that the recovery is under more pressure than previously thought,” concluded analysts at ING.
“For governments and [the] European Central Bank, this will be a wake-up call, if they needed one.”
Front page picture: Two residents in
Pamplona, north Spain, wearing face
Source: Alvaro Barrientos/AP/Shutterstock
Focus article by Jonathan Lopez