Summer ended prematurely for many European countries, with governments reintroducing social distancing measures as the dreaded second wave of infections materialized in August. While all countries in Europe have since seen a rise in cases, our sanitary risk map  shows a wide divergence between best performers (Germany, Finland) and laggards (Spain, France and the Netherlands) who have lost control of the pandemic – again. We see an elevated risk of a double dip recession in countries that are once again resorting to targeted and regional lockdowns. The higher the sanitary risk cluster, the higher the downside risk to Q4 GDP growth. We already forecast a relapse in both France (-1.1% q/q in Q4 vs. +1.0% previously forecasted) and Spain (-1.3% q/q vs +1.4% previously forecasted). With the fresh containment measures announced in the Netherlands, we now expect also a negative Q4 GDP growth reading (-1.0% vs. +0.5% previously forecasted). 

We estimate the size of the growth setback by estimating (i) the GDP at risk (social spending  and recession-sensitive components of consumption) and (ii) the shock of targeted restrictions in the economic centers (e.g. the Paris region, Catalonia and the Madrid region). 

This second wave puts to the test the economic model of key Eurozone countries, returning to pre-crisis levels will take a long time. Spain and Portugal as tourism powerhouses are on the watch list. Indeed, economies that boast a high share of Covid-19-sensitive consumption in GDP, especially spending on services that requires social interaction, and a strong dependence on tourism are most at risk. After all, fiscal policy is proving less effective at boosting confidence here than in manufacturing and construction as long as contagion fears continue to linger. There is therefore a greater risk of long-term scarring. At the same time, those countries with a high level and/or recent increase in unemployment (official or hidden ) will have more difficulties in stabilizing household confidence and reducing the high savings rate. Our economic risk map, which reflects the interaction of the relevant economic factors, shows that in Germany, Finland and Austria the risks are low, even though in Austria the consumption structure and size of the tourism sector are a weak point. The CEE manufacturing hub (e.g. Slovakia) shows medium risks, as do the Benelux countries. France, together with Italy, is in the elevated risk cluster. We are concerned by the possibility that it might weaken the Eurozone core for a while. This could further undermine policy coordination by fueling economic divergence among member states. Meanwhile Spain and Portugal are particularly vulnerable, given the importance of tourism for their economies, high unemployment and a - so far - timid fiscal policy response.