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Chief economist update: The W in the second wave

"The summer has ended
When it left, you left too..."

-Leif Garrett, When I Think of You'

Right in the middle of the Northern Hemisphere summer, the Euro Stoxx-50 index surged by 42.7% from the eight-year low it plumbed in the middle of March this year

The gradual easing of restrictions has unfrozen social and business activity in the single currency region, along with monetary and fiscal stimulus measures, sparked optimism of a V-shaped recovery in the Eurozone.

This was underscored by the OECD and the IMF's June 2020 projections.

The 'OECD Economic Outlook, June 2020' report showed the Eurozone economy advancing by 6.5% (single-hit scenario) or by 3.5% (double-hit) - outperforming the OECD's growth average of 4.8% (single-hit) or 2.2% (double-hit).

The IMF's projections send the same message. It expects Eurozone GDP growth to bounce back by 6.0% in 2021, stronger than the 4.8% recovery in advanced economies.

The sharp recovery in the IHS Markit Eurozone composite PMI to a level indicating expansion in July (54.9) from the record low reading of 13.6 in April gave substance to both institutions' forecasts.

Summer has ended. The eased restrictions over summer have given way to a second wave of coronavirus infections in the continent. Worse, Stella Kyriakides -- European Commissioner for Health and Food Safety since 2019 - notes that some countries are reporting more cases now than they did during the peak pandemic (sometime in March/April), prompting the re-imposition of some restrictions.

When it left, you left too. The impact on the economy is already captured in the latest IHS Markit Eurozone PMI survey. The composite index dropped back to a three-month low reading of 50.1 in September - the second consecutive month of decline.

Manufacturing activity continued to expand - 53.7 in September from 51.7 in August - due to a strong increase in new orders as export markets re-opened.

However, the service sector posted its biggest contraction (47.6) since May (30.5) as, according to Markit Economics, "face-to-face consumer businesses in particular have been hit by intensifying virus concerns".

This isn't lost on the Eurozone equity market. The Euro Stoxx-50 index has weakened by 5.3% from its July 2020 rebound peak and is 13.9% in the red this year to date.

Markit's forward view is on the ball: "Encouragement comes from a further improvement in companies' expectations for the year ahead, but this optimism often rests on infection rates falling, which remains far from guaranteed for the coming months. The main concern at present is therefore whether the weakness of the September data will intensify into the fourth quarter, and result in a slide back into recession after a frustratingly brief rebound in the third quarter."

Read our full COVID-19 news coverage and analysis here.

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