There are two macro trends currently accentuating in developed economies:
- the services sector recovery has been restrained in Europe by the growing number of mobility restrictions, and
- the divergence in the economic recovery between the US and Europe is widening.
In the Euro Zone, the recovery in the manufacturing sector is still on track in Europe, with historically high readings in Germany (Manufacturing PMI at 58 points) thanks to optimism in export orders. It was not the same story for services, where indices in both France and Germany were below the 50-mark threshold, a first for Germany since the first lockdown period. In stark contrast, in the US the pick-up in activity in October appears to have been driven by the service sector and this despite rising COVID-19 figures.
There is now a 10-point gap between the service sectors of each continent: the US services PMI currently stands at 56 in October (up from 54.6 in September) compared to 46.2 in the Euro Area (down from 48). This gap in performance can be linked at least in part to the difference in pandemic levels.
Source: Reuters (28/10/2020), Indosuez Wealth Management
In the US, the third wave of new infections has reached the peak of July (at approximately 70 thousand new cases per days). However, the centre of the pandemic spread is currently in Europe, notably in France, Belgium, Netherlands and Italy. The number of new infections per one million inhabitants in France was double that of the US on Tuesday. Hospital admissions are increasing and fatalities are rising in Europe, remaining for now at approximately 30% their peak levels attained in April 2020 in Spain and France.
Unsurprisingly, in this context new measures have been announced in France and Germany which will add to the already slowing mobility tracked by Google to retail and recreational places falling again since the end of September in France and more recently, but sharply in Germany.
It is therefore possible, that the US service sector is no more immune to COVID-19 than in Europe, but that they are currently experiencing a release in pent up demand for services in US between waves of the pandemic. The PMI index in Australia in October showed that the lifting of restrictions in the country during September helped activity in the services sector return to growth after a decline in August, a sign of what could be possible in the Euro Area should governments be able to regain control of this unabating second wave.
In the short term, however this new wave increases the likelihood of a contraction in Euro Area growth in the fourth quarter of 2020. Markets have begun to factor in the new lockdown measures as the Eurostoxx fell almost 4% on Wednesday. The current context begs for additional ECB support, we expect an overtly dovish tone at today’s conference.
Source: Datastream, Markit PMI, Indosuez Wealth Management
October 29, 2020