Covid lockdowns bring recession threat back to Europe

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 four biggest economies
are going into various forms of lockdown, overshadowing data 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. 

Its 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.”

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.

Bank of Italy governor Ignazio
Visco said 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.

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 imperiling the outlook.

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.

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.”

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