Week Ahead

With flash PMI data showing a marked slowdown in euro area growth momentum during August, next week’s PMI releases offer a deeper dive. Figures for Italy and Spain are likely to be closely eyed given the importance of ‘social contact’ industries such as tourism and eating out, whilst the end of the week will also offer a timely insight into European economic activity via detailed sector level PMI numbers.

Another sector firmly on the recovery path has been German industry. Factory orders in June rose sharply, up by some 37% on the month and, whilst still down some 6% on a year ago, recent PMI data have pointed to continued gains over the summer.

Expect next week’s official figures to therefore show further gains and keep hopes of a ‘v-shaped’ recovery alive.

...many of the jobs being subsidized are in industries facing potentially irreversible damage from the pandemic.

About nine million European workers, up to a fifth of those currently enrolled in the short-work programs, are in what the German bank Allianz has called “zombie jobs” — positions in the auto and airline industries, restaurants, shops and hotels and other sectors ill equipped to confront shifting consumer behavior. Many of these jobs are still on the books almost solely because of government subsidies, the bank said.

Adecco, Europe’s largest temporary employment agency, whose main business includes working with companies and labor unions to carry out restructuring plans, has been amping up its retraining.

“We see a huge wave of restructuring coming, especially in Germany, France and the United States,” said Christophe Catoir, Adecco’s president for France and Northern Europe. “In September, October and November we will probably register an additional one million unemployed in France alone — not just people in short-term work, but high-skilled people.”

Yet there are opportunities, he said. Engineers will be laid off at Airbus, which is cutting 15,000 jobs in Europe. But job vacancies currently abound for industrial and technical engineers, as well as in the pharmaceutical and agro-food industry, Mr. Catoir said.

“Creating a mobility of skills will be the basis of a rebound,” he said. “Without it you will have continued unemployment.”

U.K. Treasury officials are pushing for significant tax rises to raise at least 20 billion pounds ($27 billion) a year and plug the swelling budget deficit, according to news reports, a move that would hit the voters who’ve traditionally formed the backbone of the Conservative Party.

Citing multiple sources, the Telegraph reported late Saturday that proposals under consideration include aligning capital gains tax with income tax, slashing pension tax relief, raising fuel and other duties, introducing an online sales tax and changing the inheritance tax system.

Measures to raise taxes on capital gains and company earnings will form the centerpiece of Chancellor of the Exchequer Rishi Sunak’s budget in November, the Times reported. The corporation rate could rise to 24% from 19%.

According to the Telegraph, the moves are largely being resisted by Boris Johnson’s office, suggesting another headache for the prime minister as parliament returns this week from its summer recess.

The EU is demanding Britain continue to accept rules that prevent the government from subsidising British companies at the expense of EU rivals, even once the transition period ends on December 31.

A senior Conservative familiar with the discussions said Frost and others had privately discussed whether to soften the UK’s line on state aid, but Boris Johnson concluded that they should not do so.

“Frost has made clear to Barnier that as things stand he would have to recommend to Boris that we go for no deal. There has been a discussion about whether or not to compromise on state aid, and Boris said no.”

Informal talks are due to resume this week before the next formal negotiating round next week. On both sides, no deal is regarded as much more likely than it was a month ago. EU officials no longer think an agreement is likely to be struck before the European Council meeting on October 15-16. They are informally discussing whether there should be a separate Brexit leaders’ summit, or whether a “legal vehicle” could be devised to extend talks past December 31.

Johnson is unlikely to accept any delay to the UK’s departure, but such a move could be dressed up as implementing a deal that was agreed late this year.

A government spokesman said: “After the transition period, the UK will have its own regime of subsidy control and will not be subject to the EU’s state aid regime. The government will set out further detail of our domestic regime in due course.”