At the end of my suffering there was a doo

For the second week in a row we have lowered the outlook for current-quarter European growth. With COVID-19 cases surging and restrictions increasing across the region, it is no surprise that our Google activity index (GAI) continues to move down across the region (Figure 1). It will take time before we receive official activity readings that reflect these drags, and the impact of the policy response— both already enacted and what may be yet to come—is evolving. In most countries, the restrictions to date have been limited to high-risk activities and are geared toward limiting economic disruption. However, Ireland, Wales, Belgium, and the Czech Republic have now followed Israel in imposing extensive lockdowns. October surveys across Europe show declining consumer confidence and service sector activity (Figure 2). Our GDP forecast now looks for Europe to stall this quarter, with a flat Euro area bookended by a sharp contraction in the CE4 and modest UK and Scandi gains.

In contrast to the latest headwinds, the medium-term outlook for Europe has actually improved in response to greater expected fiscal stimulus:

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A blind eye to EU austerity rules. It has been clear for some time that the suspension of the EU regional fiscal framework would provide Euro area governments more flexibility to limit the roll-off of this year’s large stimulus, which we estimate to have boosted Euro area growth by roughly 4%. As member states submit their 2021 draft budgets to the EC, it is becoming clear that they will use this flexibility and the recovery fund transfers to offset nearly all this drag. We have revised down our Euro area fiscal drag by more than 1%-pt and now look for an aggregate drag of just 0.4%.

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Extending a helping hand to UK labor. In the UK, Chancellor Sunak made a complete U-turn on his prior decision to terminate the UK’s wage subsidy scheme at the end of this month. We think this change is worth around 0.8% of GDP and points to a smaller unemployment rise in the coming months.