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

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Europe’s economic system is sliding in the direction of a double-dip recession, with economists warning that rising coronavirus infections and recent authorities restrictions on individuals’s motion are prone 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 include the second wave of Covid-19 infections, with extra anticipated within the coming days.

On Sunday, Belgium introduced the closure of all bars and cafés for 4 weeks, whereas Switzerland widened its mandate for mask-wearing. France implement a night curfew in Paris and different cities from Saturday.

The measures observe a pointy rise in case numbers, with quite a lot of European international locations reporting file new each 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 development turning unfavorable in a number of international locations within the fourth quarter — one other recession is totally attainable.”

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 file development in eurozone gross home product when they’re printed on the finish of this month, a rising variety of economists are already chopping their fourth-quarter forecasts into unfavorable territory.

“The form of the virus resurgence and ensuing enterprise lockdowns and confidence shocks make a double-dip recession the central state of affairs,” 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 within the 12 months — are dangerous information for the European Central Financial institution, which solely final month forecast fourth-quarter development of over 3 per cent. One other setback would imperil the ECB’s belief that the eurozone economic system will return to its pre-pandemic dimension 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 faculty 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 are actually experiencing a second wave of infections . . . this implies restoration now appears additional away than we had hoped for. And the financial influence is deepening.”

Most analysts anticipate the ECB to react to a flagging economic system that just lately slid into deflation by including an additional €500bn to its emergency bond-buying programme in December. 

In an additional 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 begin distributing cash for nearly a 12 months. Within the meantime, nationwide governments “must 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 type of strict lockdowns that prompted a file 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 could have little selection however to tighten restrictions even additional.

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

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

A latest FT analysis of Google neighborhood cellular 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 carefully for indicators of how the second wave of infections is affecting the economic system. “Demand results are dominating in the meanwhile, 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 — comparable to tourism and leisure. Allianz final week slashed its Spanish and French financial forecasts, predicting that as a substitute of development 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 be aware, the identical survey discovered exercise had improved within the manufacturing sector — boosted by a rebound in international commerce, notably in exports to China. In one other upbeat signal, German manufacturing unit orders outstripped expectations by rising 4.5 per cent in August. 

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

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