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GfK Consumer Confidence: The End of Recovery in Europe?

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There has been a steady increase of covid cases across Europe as the holiday season gets underway, just like last year.

Although the levels are lower from a year ago, it was enough of a parallel for European authorities to address the issue. Most recently, Chancellor Merkel commented on Monday that the “aim was to avoid another round of lockdowns”.

Despite vaccinations, deaths from covid are also moving higher.

Again, these numbers are not as high as last year. But it still raises the question of whether they will reach the threshold for new anti-covid measures.

Looking at the historic record, the pattern of case numbers still matches prior respiratory pandemics. This would suggest another winter of high case numbers.

So how can this affect the European economy?

Is it working?

The 1918 “Spanish” flu lasted for three years.

There was the initial outbreak in the spring of 1918. At first, there were only a few cases until a massive surge happened in the winter. Then there was a further drop in cases in the summer, but by autumn they rose again, only to peak for a third time in the winter of 1919/20. After that, the disease died out.

Sounds familiar?

If the pattern is so similar, it begs the question of how effective modern advances in medicine have been in reducing the spread of a virulent disease.

There is still a significant amount of hesitancy towards vaccinations. Some epidemiologists are arguing that the delta variant is so transmissible that there is no herd immunity threshold. The implication being that despite getting the vaccine, people might still be subject to anti-covid restrictions.

That said, this information does little to motivate the hesitant to get the shot.

Any optimism in the markets?

Germany has reported a series of disappointing leading indicators.

One of these indicators is the flash PMI for August, which is at the lowest level since February. It still remains well in expansion territory, but on a downward trajectory.

Economists expect tomorrow’s Gfk Consumer Confidence survey to move further negative at -1 from -0.3 in July.

The estimations track with surveys from across the continent reported that consumers remain hesitant to spend money. The normal incentive of higher inflation to speed up monetary circulation appears to not be working.

And the ECB?

Analysts expect no surprises from the ECB, as they will continue in crisis mode, even as other central banks look to normalize rates.

A look through bond yields suggests that investors are expecting the status quo in Europe to remain the same in the near future.

However, investors might be factoring in a less optimistic reality. In fact, they believe that the “new normal” post-covid won’t be all that different from the “old normal”. This is in an economic sense, where the eurozone was slipping into technical recession even before the first reports of a novel coronavirus surfaced.

Inflation has also been moving higher over the last few months, particularly in Germany.

But the theory goes that you need economic growth to sustain inflation. And if the eurozone “recovers” fully, then we can look forward to a return to low inflation and low growth.

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