Emerging from the wreckage

Few surprises emerge from the Q2 2020 eurozone GDP growth figures, reflected in a 12.1% QoQ fall in output, in line with analysts’ expectations. Germany (-10.1%) and Italy (-12.4%) appear the least impacted, whilst France (-13.8%) and Spain (-18.5%) reflect a deeper downturn. The July Eurozone Services PMI reading of 55.1 indicates that the economy has since returned to positive monthly growth, as economies reopen following lockdowns. Attention is now focussed on the likely prospects of a second wave of Covid-19 across Europe and the return of nationwide lockdowns.

July brought good news in that EU leaders struck a deal on a €750bn coronavirus recovery package, split between €390bn in grants and €360bn in low interest loans. The funds will be allocated according to the economic damage caused by the pandemic and therefore more targeted to southern European economies. In order to stimulate demand and avoid a deflationary spiral, the European Central Bank (ECB) maintained its main policy rate at record lows and maintained the size of its emergency quantitative easing programme at €1,350bn. We have likewise seen government policy introduce temporary tax cuts to boost real incomes, although eurozone government debt level is expected to increase by 16% of GDP in order to accommodate this.

Savills Research have tracked transit mobility usage using data from Apple, as a short term lead indicator of the speed of return to the workplace across Europe. The chart below indicates that at end July 2020, public transport usage in Paris (96%) and Berlin (99%) has recovered to levels in line with pre-Covid-19. Sweden’s softer lockdown saw a lower nadir of 46% of pre-Covid public transport usage in Stockholm, which has recovered gradually to over 75%, whilst in London (64%) and Madrid (57%), workers have been slower to re-adopt public transport usage. Much of the speed of return to the workplace will depend on government advice on public transport usage and social distancing protocol.

The true health of Europe’s economy will however remain a blur until there is more labour market visibility, although Focus Economics indicate GDP growth will fall -8.2% during 2020, above previous months' growth expectations. The eurozone’s July unemployment rate has increased to 7.8%, although once furlough schemes are gradually removed throughout H2 2020, Capital Economics forecast that the unemployment rate will peak at c.10% by the middle of 2021. In Italy’s case, a number of unemployed workers have dropped out of the labour force and are now inactive, reducing the number of unemployed workers although we are now observing an increase in the overall rate.

Several southern European countries are forecast to see higher levels of unemployment increases due to exposure to the tourism sector and a higher proportion of workers on short-term contracts. European office-based employment is forecast to rise by 3.1 million over the next five years, reflecting 0.7% growth per annum.

Many questions are still yet to be answered regarding the long-term behavioural changes emerging from Covid-19 and how this will affect demand for office space. One thing that we can expect is that the historic relationship between office-based employment growth and office demand is likely to change tack as we observe a rise in flexible working post-Covid.

_{Read the articles within European Offices Outlook below.}