Home Business Europe’s second wave raises risk of double-dip recession

Europe’s second wave raises risk of double-dip recession


Europe’s economic system is sliding in direction of a double-dip recession, with economists warning that rising coronavirus infections and recent authorities restrictions on folks’s motion are more likely to reduce quick the area’s latest restoration.

Germany, France, the UK, Italy, Spain and the Netherlands have all introduced measures in the past week to comprise the second wave of Covid-19 infections. On Saturday, an evening time curfew was launched for Paris and quite a few different French cities, whereas the Italian authorities is anticipated to announce new curbs on Sunday.

Plenty of European international locations reported document new day by day an infection figures over the weekend.

“I can’t consider how briskly the second wave has hit,” mentioned Katharina Utermöhl, senior economist at Allianz. “We now see progress turning destructive in a number of international locations within the fourth quarter — one other recession is completely doable.”

Column chart of Eurozone GDP, % change on previous quarter showing Eurozone growth is set to slow after a bounce back in Q3

Whereas third-quarter figures are anticipated to indicate document progress in eurozone gross home product when they’re revealed on the finish of this month, a rising variety of economists are already slicing their fourth-quarter forecasts into destructive territory.

“The form of the virus resurgence and ensuing enterprise lockdowns and confidence shocks make a double-dip recession the central situation,” mentioned Lena Komileva, chief economist at G+ Economics, including that Brexit disruption would “additional amplify” the financial downturn.

These predictions that the eurozone economic system will slide again into recession — albeit a a lot shallower one than earlier this 12 months — are unhealthy information for the European Central Financial institution, which solely final month forecast fourth-quarter progress of over 3 per cent. One other setback would imperil the ECB’s perception that the eurozone economic system will return to its pre-pandemic measurement by 2022.

‘We’ll see you one other time’ — the Dutch authorities this week ordered bars and eating places to shut at 10pm © Sem van der Wal/EPA-EFE/Shutterstock
A abandoned classroom in a closed college in Prague — the Czech Republic has been one of many international locations hardest hit by the second wave of infections © Petr David Josek/AP

Klaas Knot, the Dutch central financial institution governor and ECB governing council member, mentioned final week: “Many international locations at the moment are experiencing a second wave of infections . . . this implies restoration now appears additional away than we had hoped for. And the financial impression is deepening.”

Most analysts anticipate the ECB to react to a flagging economic system that not too long ago slid into deflation by including an additional €500bn to its emergency bond-buying programme in December. 

In an extra signal that extra financial easing is probably going, Robert Holzmann, the usually conservative head of the Austrian central financial institution and ECB council member, mentioned: “Extra sturdy, intensive or strict containment measures will seemingly require extra financial and financial lodging within the quick run.”

The EU’s deliberate €750bn recovery fund remains to be being debated and so is unlikely to start out distributing cash for nearly a 12 months. Within the meantime, nationwide governments “have to bridge the hole”, mentioned Nadia Gharbi, economist at Pictet Wealth Administration.

Line chart of Eurozone services purchasing managers' index (below 50 = contraction in activity) showing September's PMI report showed signs of a 'double dip' in the economy

Political leaders nonetheless hope to keep away from the form of strict lockdowns that triggered a document postwar recession within the second quarter. “Politicians have learnt their classes from the primary wave,” mentioned Jörg Krämer, chief economist at German lender Commerzbank. “A second undifferentiated lockdown is to not be anticipated due to the immense financial prices.”

But with daily infection levels in many countries rising above the earlier peak of the pandemic in March and April and hospital beds filling up once more, governments might have little selection however to tighten restrictions even additional.

Even with out full-scale lockdowns, economists say the mere proven fact that the coronavirus an infection fee is capturing up is more likely to hit client exercise, prompting extra folks to remain dwelling and spend much less cash — simply as they did when the pandemic first hit. 

“If folks get scared and keep at dwelling, then precautionary financial savings will go up once more and that might push us into one other destructive quarter of GDP,” mentioned Erik Nielsen, chief economist at UniCredit. “With these kinds of shocks it hardly takes something to push us into destructive territory.”

A latest FT analysis of Google group cell information discovered that after rising for months, footfall in cafés, eating places, retail and leisure venues began in early October to say no once more in many European cities, together with Paris, London, Amsterdam, Berlin and Madrid.

Central bankers are watching this high-frequency information intently for indicators of how the second wave of infections is affecting the economic system. “Demand results are dominating in the mean time, and labour-intensive service sectors are being very badly affected,” mentioned an ECB governing council member. “A double-dip is feasible.”

That spells hassle for international locations like France, Spain and Portugal, which have massive service sectors requiring a excessive degree of social interplay — akin to tourism and leisure. Allianz final week slashed its Spanish and French financial forecasts, predicting that as a substitute of progress they might contract by 1.3 per cent and 1.1 per cent within the fourth quarter, respectively. 

Some weak point was already evident in final month’s IHS Markit survey of buying managers, which discovered for the primary time since Might {that a} majority of eurozone providers companies had been reporting a sharp drop in exercise from the earlier month. 

On a brighter word, the identical survey discovered exercise had improved within the manufacturing sector — boosted by a rebound in international commerce, significantly in exports to China. In one other upbeat signal, German manufacturing facility orders outstripped expectations by rising 4.5 per cent in August. 

Carsten Brzeski, chief eurozone economist at ING, mentioned some German manufacturing firms had been privately boasting they anticipated to have “the very best quarter for a while” within the closing three months of this 12 months. “This might simply be sufficient to keep away from a double-dip,” he mentioned.


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