Lockdowns bring recession threat back to Europe
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TUESDAY, JANUARY 31, 2023
Lockdowns bring recession threat back to Europe

Global Economy

Fergal O'Brien and Catherine Bosley, Bloomberg
01 November, 2020, 11:05 am
Last modified: 01 November, 2020, 12:23 pm

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Lockdowns bring recession threat back to Europe

Third-quarter rebound has been cut short by virus lockdowns

Fergal O'Brien and Catherine Bosley, Bloomberg
01 November, 2020, 11:05 am
Last modified: 01 November, 2020, 12:23 pm
A pedestrian crosses a road, as streets have again become empty in Milan, Italy, amid precautions against coronavirus second wave. Photo :Collected
A pedestrian crosses a road, as streets have again become empty in Milan, Italy, amid precautions against coronavirus second wave. Photo :Collected

Europe's economic recovery is being cut short as governments implement new restrictions to fight the coronavirus that risk driving the region toward another recession.

The euro area's four biggest economies are going into various forms of lockdown, overshadowing data on Friday that showed a record surge in third-quarter output.

A new slump is on the cards, governments are pumping in additional aid, and the European Central Bank is promising more monetary stimulus amid the rapidly deteriorating situation. It's vice president, Luis de Guindos, said that stagnation, or even contraction, can't be ruled out this quarter.

"The economic picture has definitely gotten worse," said Carsten Brzeski, chief economist at ING Germany. "It's called a double dip."

The euro area's recovery from the first coronavirus lockdowns in the spring was already looking like a dead-cat bounce before this week's developments. Measures of activity were dropping, and confidence among companies and consumers had started to wobble after the summer bounce.

European stocks have tumbled, with the Stoxx Europe 600 Index heading for a third straight weekly decline. The impact on sovereign borrowing costs has been muted by ECB bond-buying.

In France, bars and restaurants will shut until at least the start of December, public gatherings are banned and non-essential retailers will also close. Germany will shutter businesses in hospitality and put restrictions on gatherings, while Italy is limiting opening hours.

 "We expected the recovery to stall. The latest development makes an outright contraction likely," said Bloomberg economists Jamie Rush, Maeva Cousin and David Powell.

Bank of Italy Governor Ignazio Visco said Friday the fresh wave of the pandemic will set back the repair of economies. Progress so far has been helped by huge government spending and emergency ECB stimulus, both of which will need to be ramped up even further.

"The resurgence of the pandemic threatens the results achieved so far," Visco said. "There is a risk that the increase of virus cases, even though contrasted with less drastic measures than in the spring, will have a negative impact on the confidence and spending of families and businesses."

While the new lockdowns aren't as severe as the first round, the impact will still be dramatic as countries strive to get a handle on infections.

French Finance Minister Bruno Le Maire said his government's measures could cut economic activity in France by 15%. Deutsche Bank forecasts a German contraction of about 0.5% this quarter.

The third-quarter GDP figures demonstrate that economies bounce back fast once lockdowns end. But some of the pain is longer-lasting – output levels remain well below their pre-crisis levels, with Germany, France and Italy all between 4% and 5% short, and Spain's gap at 9%.

Months of subdued demand have wiped out cash flows, crippling smaller businesses. On top of that, some government aid programs to protect firms and their employees are less generous than at the start of the pandemic.

There's also a risk that households will respond differently. While there was hope back in spring that the lockdown would be a one-off, that may not be the case now.

For Olivier Blanchard, senior fellow at the Peterson Institute for International Economics and a former International Monetary Fund chief economist, heightened consumer worries about rolling lockdowns and jobs could prompt a deeper retrenchment. The same logic applies to businesses, further imperilling the outlook.

Blanchard's view is that governments will have to spend big to prevent more damaging, long-term effects from the lockdowns.

ECB President Christine Lagarde said similar in her press conference on Thursday, when she called for more fiscal outlays effectively promised fresh stimulus -- of some form -- in December that will keep government borrowing costs down.

In a Bloomberg Television interview on Friday, Governing Council member Robert Holzmann said that despite the latest economic setback, such support from public authorities should be enough to avoid a double-dip.

"It won't be a recession as steep as we had, say, in the second quarter," he said. "Quarter four was already envisaged to be not as strong as the third quarter. This is likely to weaken given the current environment, but it won't be as steep as it is currently envisaged by some."

Disclaimer: This article first appeared on Bloomberg.com, and is published by special syndication arrangement.

Top News / World+Biz

Recession / lockdown / Europe

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