Line chart of Index, long-term average =100 showing August

Virus resurgence darkens Spanish outlook

A dip in economic sentiment in Spain this month indicates that the recent rise in Covid-19 infections is taking its toll on the nascent recovery under way in the eurozone. 

The European Commission’s monthly survey of economic sentiment across the eurozone rose to 87.7 in August from 82.3 in the previous month. 

However, economists looked with concern at the fall in sentiment in Spain, where the number of new infections has risen the most in the region. 

The country’s economic sentiment indicator fell to 88.1 in August from 90.6 in the previous month. The fall was the result of widespread deterioration across all sectors, with confidence falling furthest in the services sector. 

“This is an ominous sign, given that virus numbers have been rising exponentially elsewhere too,” said Melanie Debono, economist at Capital Economics.

The eurozone reading was better than the improvement to 85 expected by economists polled by Reuters, but it was still well below the long-term average of 100 and the February reading of 103.4. 

“In the euro area, the European Sentiment Indicator’s recovery resulted from a sustained improvement of industry, retail trade, and, in particular, services confidence,” the commission said. 

Confidence edged down in construction and remained broadly stable among consumers. The improvement signals that economic activity in the eurozone continued to grow, albeit at a slightly slower rate than in June and July, when there was a rapid rebound after the easing of lockdown measures imposed to keep coronavirus at bay. 

“The second quarter was horrible — the economy collapsed — so when you exit from the lockdowns it is bound to improve very fast initially before the pace of recovery then starts to slow and that is what we are seeing now,” said Gilles Moec, chief economist at Axa.

In Spain, however, the outlook was particularly gloomy. The bloc’s fourth-biggest economy registered the worst spike in new infections in August, prompting restrictions to be reimposed. Spain is suffering from a lack of tourist revenues, a more important source of income for it than for other major economies. 

Spanish retail sales rose 1.1 per cent from June to July, but they remain 4 per cent below last year’s levels, the national statistics office said on Friday. Some regions that rely heavily on tourism have been hit particularly hard, such as the Balearic Islands and the Canary Islands, where retail sales fell 14.8 per cent and 13.2 per cent from last year respectively.

The French services and retail sectors saw a sharp rebound in confidence in August © Nathan Laine/Bloomberg

In Germany, the net balance of services businesses that reported improving conditions turned positive for the first time since the lockdown © Alex Kraus/Bloomberg

In contrast, economic sentiment in the region’s two biggest economies, France and Germany, saw sustained improvement in August, rising by 9.3 and 5.9 percentage points respectively. 

In Germany, the net balance of services businesses that reported improving conditions turned positive for the first time since the lockdown, while manufacturers and retailers reported better conditions. In France, the services and retail industries had the sharpest rebounds in confidence.

In Italy, economic sentiment climbed, with improvement across all sectors, but at a slower pace — 2.7 percentage points up from July — than in other countries and than in the previous month.

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The scale of the pandemic’s impact on the French economy was underlined by separate figures showing that household disposable income suffered the biggest quarterly fall for more than 70 years in the three months to June.

The 2.3 per cent drop in France’s gross disposable household income in the second quarter underlined how the pandemic and subsequent lockdown caused millions of people to be placed on a state-subsidised furlough scheme or to lose their jobs entirely.

Insee, the national statistics office, said on Friday that it was the biggest quarterly fall in household disposable income since 1949. 

The recent strong rebound in French household spending on goods also tailed off in July, when it rose only 0.5 per cent from the previous month, Insee said. That undershot most economists’ expectations for stronger growth of about 2 per cent. Insee said household consumption of services remained “well below its usual level” in July.