New cases of Covid-19 in some countries may delay economic recovery

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The new escalation of Covid-19 cases in several countries and, consequently, the possibility of adopting new restrictive measures to contain a second wave of the pandemic, cast doubt on the speed of recovery of the global economy.

For now, economists have ruled out reversing the upturn. But, with the increasing risk of new regional blockages, they are already expecting a substantial slowdown at the current pace, further postponing the return of activity to the pre-pandemic level. This concern has already been reflected in the mood of the financial market, with global exchanges registering declines in recent days.

In the UK, Prime Minister Boris Johnson announced new restrictive measures, limiting the opening hours of bars and restaurants until 10 pm, for example. He also warned the British that the country should not expect a return to social normality for at least six months. In Spain, 850,000 residents of Madrid and the metropolitan area will not be able to leave their neighborhoods for two weeks, except for essential tasks.

In the accounts of the English Oxford Economics, the measures already announced still have a small impact, of only 0.2 percentage point in the monthly reading of the United Kingdom’s Gross Domestic Product (GDP). However, as the consultancy worked with the scenario that the restrictions would be relaxed, the movement on the contrary forces it to review its calculations. Until then, according to Oxford economist Martin Beck, the expectation was that English GDP would increase by 1.4% in October, 4.5% in the last quarter and a fall of 9.5% in the year.

“But if the announced measures prove to be insufficient and are an omen of a two-week block, the projection for fourth quarter GDP can be cut by 2.5 points,” she says in a report. In October, the negative impact could be 8 percentage points, says Martin.

The new restrictions that begin to appear follow the increase in contamination by Covid-19 in the region. Last weekend, France broke the record for new infections in 24 hours, while the UK reached the highest rate since 8 May.

For now, the blocks that have been announced are limited, but the numbers add to the fear of a second lockdown national economy, which would be a disaster for the recovery of the region’s economies, warn economists.

“The problems of containing viruses in the United States and in emerging countries are added to the growing number of cases in Europe,” warns JP Morgan in a report. The American bank sees the global recovery movement still strong, but incomplete amid the risk of new blockages and the lack of ammunition from governments to respond to the recovery movement.

Brake signals

Oxford Economics recalls that the economic recovery continues uninterrupted, but has slowed down. In the data, a sign of this brake on recovery can already be seen in the PMIs (Purchase Managers’ Index), which usually anticipate movements in economic activity. In countries like Spain, where the recent growth of cases has been surprising, especially in the vicinity of Madrid, it is clear to repeat.

The Spanish Industrial PMI fell to 49.9 points in August – numbers below 50 indicate contraction in economic activity. In the service sector, the situation is worse, with a drop from 51.9 to 47.7 points between July and August. In the euro zone, there was also a reduction in the Composite PMI, which encompasses both sectors, from 54.9 to 51.9 in the last month.

Economist Alexandre Lohmann, from GO Associados, recalls that the “easy part” of the resumption has passed. “The rebound was already at risk of becoming a ‘rebound in W’, with a strong recovery followed by a further fall before having the final recovery. In this context, restrictive measures, even limited, do not help. The first signs of this resumption in W are beginning to appear in the PMI of countries that have a strong second wave, such as Spain.

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