Virus Plunges Euro-Area Into Recession, Spain Takes Biggest Hit (Bloomberg)
Last Modified: 05:07 AM, Fri Jul 31, 2020

Fergal O'Brien and Catherine Bosley

Bloomberg. 31 July 2020

Word Count: 673

This is for Research purpose only

(Bloomberg) -- The euro-area economy plunged into an unprecedented slump in the second quarter, putting it in a deep hole from which it may take years to fully recovery.

Spain took the biggest hit in the period, shrinking 18.5%, while French and Italian output also dropped by double digits. The euro area saw a 12.1% contraction. The declines in activity reflect the effect of strict quarantines measures on businesses and consumer spending, and a slump in tourism in some countries.

The health crisis was most severe in the region’s least economically resilient members, leaving them with little firepower to support households and businesses. That forced European Union leaders to overcome longstanding differences on joint borrowing and agree an historic 750 billion-euro ($889 billion) rescue fund this month.

National governments have already stretched their budgets to deal with the crisis, and the European Central Bank launched a 1.35 trillion-euro bond emergency program to contain the economic shock.

The ECB’s actions have particularly targeted southern Europe after bond yields in Italy spiked early in the crisis because of investor worries that huge health spending could cripple the the country’s already-weak finances.

While the economy’s second-quarter slump was less than in Spain or France, it’s in a particularly vulnerable position because of its debt burden and weak long-term growth.

Overall, the rebound in Europe is under threat from a surge in new outbreaks that’s emerging across the globe. Governments are reluctant to impose strict national lockdowns, but economies could suffer anyway if fear of infection alters consumer behavior, stops people going to stores, bars and restaurants.

That puts countries such as Italy, Spain and Greece -- all of which have huge tourism sectors -- particularly at risk. Spain’s already bad summer season took a turn for the worse last weekend when the U.K. announced that holidaymakers returning from the country would have to quarantine because of an uptick in coronavirus cases in some regions.

The other major risk is long-term damage to the labor market. Government support programs in Europe prevented unemployment from surging as it has in the U.S., but they may only be delaying rather than preventing devastating layoffs.

With the outlook so uncertain, economists expect the ECB to increase its bond-purchase program again before the end of the year. Data Friday showed euro-zone inflation at 0.4%. That was better than expected, but it’s far short of the central bank’s goal of just under 2%, and the central bank doesn’t see price growth getting back to that level for years.

At the ECB, researchers this week said not all workers on furlough programs may return to work, meaning unemployment is expected to rise in the coming months. Bloomberg Economics estimates that some 26 million people were furloughed in Germany, France, Italy and Spain at the peak of the crisis.

Euro-area unemployment is already slowly creeping higher, and job losses are already mounting as companies across the continent respond to weak demand and a dramatically changed global backdrop, particularly for travel and tourism. A mounting toll could weaken the recovery by undermining confidence and demand, leading to further cuts and setting off a negative spiral.

Airlines have announced thousands of job cuts, while France’s Airbus SE could eliminate 11% of its global payroll. Its plans to reduce headcount in Spain -- where unemployment is already high -- sparked demonstrations earlier this month.

High frequency data and surveys show that activity has so far bounced back from its trough in April and May. The sustainability of that is in question however, particularly amid growing concern about fresh virus outbreaks.

Germany, where the economy shrank 10% in the second quarter, has already, sounded the alarm over rising infection rates. In the U.K. the government reimposed lockdown restrictions across a large part of northern England.

“We observed a slight recovery in sentiment and certain soft indicators. So we can say in Europe we have the first signs of recovery,” ECB Governing Council member Yannis Stournaras said in a Bloomberg interview this week. “Still, the risks are on the downside.”

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