Europe’s second wave increases the threat of a double recession

Europe’s economy is sliding into a double dip recession, with economists warning that rising coronavirus infections and new government restrictions on the movement of people are likely to disrupt the region’s recent recovery.

Germany, France, the United Kingdom, Italy, Spain and the Netherlands announced measures last week to contain the second wave of Covid-19 infections. On Saturday, a nightly curfew was introduced for Paris and several other French cities, while the Italian government is expected to announce new restrictions on Sunday.

Several European countries reported record numbers of new daily infections over the weekend.

“I can’t believe how quickly the second wave has come,” said Katharina Utermöhl, senior economist at Allianz. “Now we see growth turning negative in several countries during the fourth quarter; another recession is absolutely possible.”

While the third-quarter figures are expected to show record growth in the eurozone’s gross domestic product when released later this month, a growing number of economists are already reducing their fourth-quarter forecasts to negative territory.

“The form of the virus resurgence and the ensuing trade lockouts and confidence shocks make a double dip recession the center stage,” said Lena Komileva, chief economist at G + Economics, adding that the Brexit halt “would further amplify. plus “the economic recession.

These predictions that the eurozone economy will slip back into recession, albeit much shallower than earlier this year, are bad news for the European Central Bank, which only last month forecast fourth-quarter growth of more than 3 %. Another setback would jeopardize the ECB’s belief that the eurozone economy will return to its pre-pandemic size by 2022.

Klaas Knot, governor of the Dutch central bank and member of the ECB’s governing council, said last week: “Many countries are now experiencing a second wave of infections. . . this means that recovery now seems further away than we expected. And the economic impact is deepening. “

Most analysts expect the ECB to react to a weakened economy that recently slid into deflation by adding an additional € 500 billion to its emergency bond purchase program in December.

In another sign that further monetary easing is likely, Robert Holzmann, the normally conservative head of the Austrian central bank and a member of the ECB’s board, said: “Longer, more extensive or tighter containment measures will likely require more monetary and fiscal adjustments. in the short term. run.”

The € 750 billion recovery fund planned by the EU is still being debated, so it is unlikely that it will start distributing money for almost a year. Meanwhile, national governments “must close the gap,” said Nadia Gharbi, an economist at Pictet Wealth Management.

Political leaders still hope to avoid the kind of strict lockdowns that caused a record postwar recession in the second quarter. “Politicians have learned their lessons from the first wave,” said Jörg Krämer, chief economist at German lender Commerzbank. “A second undifferentiated lockdown is not expected due to the huge economic costs.”

However, with daily infection levels in many countries above the previous peak of the pandemic in March and April and hospital beds refilling, governments may have little option but to tighten restrictions further.

Even without large-scale lockdowns, economists say that the mere fact that the coronavirus infection rate is skyrocketing will likely affect consumer activity, causing more people to stay home and spend less money, just as they did when the pandemic first hit.

“If people get scared and stay home, then preventative savings will increase again and that could lead to another negative quarter of GDP,” said Erik Nielsen, chief economist at UniCredit. “With these kinds of shocks, it takes almost nothing to get us into negative territory.”

A recent FT analysis of mobile data from the Google community found that after rising for months, crowds in cafes, restaurants, retail stores and entertainment venues began to decline again in many European cities in early October. , including Paris, London, Amsterdam, Berlin, and Madrid.

Central bankers are watching this high-frequency data closely for signs of how the second wave of infections is affecting the economy. “The effects of demand are dominating at the moment, and the labor-intensive services sectors are being hit hard,” said a member of the ECB’s governing council. “A double dive is possible.”

That means problems for countries like France, Spain and Portugal, which have large service sectors that require a high level of social interaction, such as tourism and leisure. Allianz last week cut its economic forecasts for Spain and France, predicting that instead of growth they would contract by 1.3% and 1.1% in the fourth quarter, respectively.

Some weakness was already evident in last month’s IHS Markit survey of purchasing managers, which found for the first time since May that most eurozone service companies reported a sharp drop in activity from the previous month.

On a more positive note, the same survey found that activity had improved in the manufacturing sector, driven by a rebound in world trade, particularly in exports to China. In another upbeat sign, German factory orders beat expectations by rising 4.5% in August.

Carsten Brzeski, chief eurozone economist at ING, said some German manufacturing companies privately boasted that they expected to have “the best quarter in some time” in the last three months of this year. “This could be enough to avoid a double dip,” he said.