Euro zone economy set for deepest recession on record

Business

The euro zone economy is already in its deepest recession on record, who have stuck to a bleak outlook and worry the downturn might be even worse as coronavirus lockdowns across the bloc take their toll.

That comes despite the European Central Bank pledging to buy more than 1 trillion euros in assets this year to cushion the blow and governments outlining hundreds of billions in spending plans to bridge businesses and support workers.

The latest poll, taken April 14-22, showed the bloc’s economy contracting by 3.1% in the first quarter and 9.6% in the current quarter. That compares with 3.3% and 9.3% contractions, respectively, predicted in a poll published on April 3.

Those forecasts for the quarter-on-quarter downturn have not changed much over the past few weeks, unlike the outlook for the United States. But if realised, this quarter would mark the sharpest decline on record.

The euro zone economy was then expected to grow 5.2% in the third quarter and 2.9% in the final quarter of this year, compared with 6.0% and 2.0% forecast in the poll a few weeks ago.

But 95% of economists said the risk to their forecasts for the second half of this year were skewed more to the downside.

“The deeper the recession goes and the longer it lasts, it increases the risk that we have more damage to the supply potential of the economy since the likelihood of workers becoming unemployed and companies going bust is high,” said Spyros Andreopoulos, senior European economist at BNP Paribas.

“The policy response has so far been less decisive. That’s why we don’t expect to go back to the previous baseline forecasts for growth soon.”

For 2020 as a whole, GDP was forecast to contract 5.4%, the worst year since the common currency was introduced in 1999. That is still better than the International Monetary Fund’s latest forecast for a decline of 7.5%.

But asked for their worst-case scenario, the median view was for a 12.0% contraction in 2020. Reflecting the high level of uncertainty, the forecasts ranged from -5.0% to -21.0%.

“It is difficult to think that things will return to normal right after the lockdown. There will be some changes on the supply and demand side because behaviors are going to be changed for quite a while,” said Philippe Gudin, chief European economist at Barclays.

“Will people return to their old habits, will they travel again quickly? There is huge uncertainty but for sure the risk to our scenario is to the downside.”

About 70% of nearly 50 economists who responded to an additional question said the recovery would either take the shape of a “U” or a tick mark. Only one-fifth expect it to be a quick, “V”-shaped recovery.

The euro zone’s three largest economies – Germany, France and Italy – have been severely affected by the COVID-19 virus and while the curve for new cases has declined, the lockdowns were still in place.

Germany’s economy was expected to contract 5.3% this year, France’s by 5.5%, Spain’s by 6.6%, with Italy taking the biggest hit, shrinking 7.8% this year, medians from the poll showed.

The IMF estimated -7.0% for Germany, -7.2% for France, -8.0% for Spain and Italy was estimated to contract 9.1%.

But the range of views for this year in the latest poll for all were wide, from no growth for Germany to as low as -18% for Italy.

ECB NOT DONE YET

Over three-quarters of economists, 30 of 38, who answered another question said the ECB was not yet done easing policy.

Most respondents predicted the ECB would increase existing asset purchases. Some said it would eventually have to start buying exchange-traded funds like the Bank of Japan currently does.

A majority of economists said the ECB would exhaust its 750 billion euros of additional pandemic-response asset purchases and 120 billion euro of already-announced purchases, with a few forecasting it to be done by the end of September.

Most said the ECB would increase the size of these programmes rather than end them. The ECB’s balance sheet, currently around 5.3 trillion euros, was expected to grow to 6.2 trillion euros by end-2020 and expand further to 6.7 trillion euros by end-2021.

“We think the ECB is at this stage a sufficient backstop,” said BNP Paribas’ Andreopoulos. “But at the same time, the ECB is operating in a different legal and political framework than the Fed or the Bank of Japan and therefore we are a lot less certain that the ECB will be able to provide an indefinite backstop to countries.”