HomeEuropean Lockdowns to Weigh on Economic Performance

European Lockdowns to Weigh on Economic Performance

Europe is having a hard time. From being badly hit by the coronavirus pandemic, European economies are under renewed lockdowns. 

As the new year started, most European economies announced tougher lockdown measures. Germany went as far as it extended the lockdown until the end of the month. Should the country not manage to curb the virus’ spread, the lockdown will likely extend.

All these measures take their toll on economic activity. While solving the health crisis is the top priority, another concern is the length of it: the longer, the worse for the economic activity and households’ income.

Poor Economic Data to Start the Year

This week’s economic data out of the Euro area showed ongoing concern. While the PMI Manufacturing remained in the expansionary territory, the unemployment in Spain is on the rise and in Germany stalls.

The Italian Services PMI data for the month of December surprised to the downside. The release, expected to come out at 45 (well below the 50 level, which signals an expanding sector), fell to 39.7. All major Eurozone countries had their Services PMI below the 50 level – unsurprisingly considering that one of the measures part of the new lockdowns is early curfew. Therefore, restaurants and bars are closed or close very early, for example. Because the services sector is the backbone of the European Gross Domestic Product (GDP), this week’s releases are worrying for future economic growth.

In contrast, the ISM Manufacturing and Non-Manufacturing in the United States reached elevated levels – 60.7, respectively 57.2. The difference was quickly reflected in the EURUSD exchange rate, which dropped yesterday about a hundred pips to 1.2250 from 1.2340 area.

The move lower in the exchange rate is good news for the ECB as it struggles to fight extremely low levels of inflation. The CPI Flash Estimate calculated on a yearly basis disappointed yesterday – it dropped from -0.2% to -0.3%. Also, the core data, that excludes volatile prices such as energy prices, remained stuck at 0.2% – just above the deflationary boundary.

Finally, the Eurozone Retail Sales indicator, the MoM release, surprised to the downside too. On expectations of -3.4%, retail sales dropped by -6.1%.

There is hardly any positive in all of the economic data from the Eurozone that was released this week. Yet, the Euro is one of the strongest currencies on the FX dashboard. The EURUSD, while dropping, remains at elevated levels, and the EURJPY as well, as it trades above 127.

It remains to be seen where the Euro will stand at the end of the lockdowns. If the United States economy keeps outperforming, the EURUSD exchange rate will need to come down from the highs.

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