This week has been more optimistic than the majority of 2020, lifted by positive news on the development of the long-awaited COVID-19 vaccines. Moderna, an American biotechnology company, reported an efficacy rate of nearly 95%, a week after similar results were announced by a rival candidate vaccine, BioNtech. These encouraging announcements boosted the likelihood that a vaccine will be distributed soon, buoying equity markets around the world. Some of the best performing indices were those in Europe, which had previously suffered weeks of decline as growing numbers of COVID-19 cases prompted further economic restrictions.
Despite the good news, several European countries have implemented more severe restrictions, as cases of COVID-19 continue to rise rapidly. Earlier this week, Austria took the unpopular step of closing schools and non-essential shops, while Scotland announced that eleven local authority areas will be subject to level four restrictions from today, and non-essential travel into or out of these areas will soon be made illegal.
Those moves follow the reimposition of restrictions in the Netherlands, Belgium, France and Germany, where COVID-19 cases have now started to come back down, as illustrated in the right-hand pane of the chart below. But elsewhere in Europe cases continue to rise, as shown on the left-hand side of the chart below.
Although rising infections are not limited to Europe, cases here accounted for 45% of the 4 million new cases identified worldwide over the past week, down from more than 50% in the previous week as the US’s share swells. While that has been driven by increased testing in Europe relative to elsewhere (first chart below), the share of tests returning a positive result has also risen (second chart below).
According to the World Health Organisation, a positive rate of less than 5% is an indication that the epidemic is under control. Notably, all countries shown in the chart have a rate above 5%, with levels above those seen in spring: implying, at least on this metric, that the outbreak is now more widespread than at any previous point. The only exceptions are the UK and Italy, where positive test rates remain below the highs seen earlier in the year.
But neither the UK nor Italy look so favourable in terms of daily deaths attributed to COVID, with almost 600 people in the UK dying on Tuesday for COVID-related reasons — the highest daily total since mid-May. On the same day, Italy’s toll of 731 deaths was the highest it had been since the beginning of April, when the country was in full national lockdown.
With many countries struggling to contain the virus, and lockdowns reimposed across much of Europe, it is likely that European output will shrink in the final quarter of 2020. The extent to which it shrinks will depend on the length and severity of the lockdowns in place, as well as adherence to them. So far, with lockdown conditions less severe than those imposed in March and with adherence seemingly slipping in most European countries, the negative impact on the economy is likely to be much weaker than during the first wave.
Even so, INSEE — the French national bureau of statistics — estimated earlier this week that France’s economic output will contract by anywhere between 2.5% and 6.0% in the final quarter. At the extreme, that will leave output around 10% below its pre-Covid level, shifting France from what has been a ‘V-shaped’ recovery onto a ‘W-shaped’ trajectory.
Our Economic Sentiment Indicator, which distils information from numerous consumer and business surveys in order to provide a gauge of underlying economic activity in France, suggests that the downturn might not be quite as extreme, having softened a little in October but remaining above zero — the threshold which signals potential economic expansion or contraction.
Arguably, November’s data will be key, with the new restrictions on movement having come into force at the very end of October. For now, our Economic Sentiment Indicators for both France and elsewhere remain above the levels seen during the first outbreak, as shown in the chart below.
 Currently, we have Q3 GDP data for 31 countries. Of these, France was the top performer, with quarterly growth of 18%.
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