The decline in the second quarter was revised to -11.8% from a previous estimate of -12.1%. Domestic lockdowns were the dominant theme and the reopening has been driving a rebound that will be visible in third quarter numbers.

Supermarket shoppers in France

It’s all about the lockdowns

Some more detail has become available on the largest quarterly decline in GDP ever recorded in the eurozone. Investment and consumption were the main drivers of the GDP decline in the second quarter, confirming the obvious: this decline has been largely driven by the domestic lockdowns in place to curb the spread of the Covid-19 virus. The drop in consumption detracted 6.6 percentage points from GDP, while the decline in investment detracted 3.8ppt. Net exports detracted just 1ppt as both exports and imports experienced an enormous decline, causing only a relatively small net negative for total GDP.

As domestic lockdowns have been key, the divide between countries experiencing milder and more severe lockdowns has become very apparent from the growth figures, which coincides with a north-south divide known from the euro crisis. Countries like Spain, Greece, Portugal and Italy all experienced worse than average declines, while Germany, the Netherlands, Austria and Finland outperformed the eurozone figure. The deeper the decline, the more difficult the recovery, confirming the need for the recently agreed EU-wide recovery fund.

Expect a historic recovery in 3Q figures, but don’t think that reflects 3Q dynamics well

At the end of April, real-time indicators of activity reached a turning point and then started to recover as economies cautiously started to reopen. And while the recovery has lost speed in August, according to early survey data, the bounce back from the April lows will be enough to see a whopping GDP growth rate in 3Q. Those 3Q numbers will therefore not tell us all that much about the growth dynamics in the quarter itself, but more about the jump in activity on the back of reopening economies, which happened in 2Q.

Productivity based on hours worked is increasing at the moment, can it last?

Also interesting from these numbers is the employment data. The decline in employment was just -2.9%, indicating a historic decline in productivity as the GDP drop was in double digits. This is, of course, due to the large amount of workers on short-time work schemes, meaning that people are kept on payrolls subsidised by government.

This becomes apparent from the hours worked data released today, which shows a decline of -16.4%. That puts the current employment situation in better perspective and reflects true labour market demand at the moment. In fact, based on hours worked, an increase in productivity can be noted in 3Q. Don’t expect that improvement to last though, as this is likely driven by a composition effect. The fact that sectors hindered by lockdown measures are more labour intensive will be a driving force, which means that the reopening of economies will have a reverse effect on productivity. In the longer term, some of that effect could be maintained if structural changes in sectors struggling with the virus can be achieved. That will largely depend on how quickly businesses decide to restructure.