On paper the European economy is snapping back smartly from the pandemic, growing more in the third quarter than it ever had. But images from Paris, Madrid and Frankfurt tell a different story. Cafes are rolling up their awnings, theatres are cancelling performances, and it’s starting to look like March again on city streets.
The risk of another severe downturn in Europe is rising as new lockdowns take effect in countries like Germany, France and Belgium, where authorities are desperate to prevent a surge in coronavirus infections from overwhelming hospitals.
Instead of returning to a semblance of normalcy, governments in the European Union, America’s largest trading partner, are straining to find ways to support furloughed and unemployed workers, and to keep restaurants and other businesses from going bankrupt.
This week, in an extraordinary move, the European Central Bank all but promised to unleash new relief measures by December at the latest. Warning that risks are “clearly tilted to the downside,” Christine Lagarde, the central bank’s president, indicated that its Governing Council is just trying to decide what cocktail of lending measures, bond market intervention or rate cuts would best stimulate the eurozone economy.
Even Lagarde, who probably has access to more detailed information about the eurozone economy than anyone on the planet, was unsure whether the region was headed for another big dip or moderately slower growth.
The gloomy and uncertain outlook overshadowed Friday’s news of a record 12.7 per cent quarterly increase in gross domestic product from the previous quarter in the 19 countries that use the euro. That rebound exceeded economists’ expectations but still left output 4.3 per cent lower than it was a year earlier — a severe recession by any standard.
There is unfortunately still no evidence that you can simply turn on and off an economy like a light switch without causing more structural damage, maybe even a short circuit.Carsten Brzeski, global head of macroeconomics at ING Bank
A few months ago some optimists were talking about a V-shaped recovery, a sharp decline followed by a sharp rebound, or perhaps a check-mark recovery — a decline followed by a gradual rebound.
What is developing looks more saw-toothed, a jagged series of economic ups and downs coinciding with waves of infection and renewed lockdowns.
“We are completely reliant on the development of the virus,” said Sylvain Broyer, chief economist at S&P Global Ratings in Europe.
The volatile growth pattern repeated itself at the national level. Germany recorded an 8.2 per cent increase in GDP in the third quarter compared with the previous quarter, but business surveys indicate that the pace is likely to slow markedly in months to come.
France grew more than 18 per cent in the quarter, according to official data published Friday. But Bruno Le Maire, the French finance minister, said a tough fourth quarter would cause the economy to shrink by 11 per cent for the full year.
The economic cost is particularly high in industries that depend on person-to-person contact. The longer the pandemic lasts, the greater the risk of mass bankruptcies among service businesses like hotels, fitness studios and nail salons. In Paris, the hotel occupancy rate plunged to 26 per cent in September, when a new curfew was put into effect, according to MKG Group, a French consulting firm. That figure is likely to worsen.
“There is unfortunately still no evidence that you can simply turn on and off an economy like a light switch without causing more structural damage, maybe even a short circuit,” Carsten Brzeski, global head of macroeconomics at ING Bank, said in a note to clients.
Only a few months ago Europe appeared to be coming back to life. Trade fairs resumed and theaters reopened, albeit with restrictions on attendance. La Monnaie, the Brussels opera house, was brave enough to try to stage a production of Die Tote Stadt by Erich Wolfgang Korngold. To avoid the need for an intermission, the length of the performance was slashed to less than two hours, and the size of the orchestra was trimmed so that the musicians would not be crowded too tightly together.
To little avail. As Belgium recorded one of the worst infection rates in the world, authorities forced the opera to close this month after just two performances.
There is some reason to hope that the latest lockdowns will not be as deadly to growth as the first round. Schools, factories and many offices will remain open, at least for the time being. Harald Wilhelm, the chief financial officer of German automaker Daimler, told reporters last week that traffic at Mercedes showrooms remained strong and that parts were flowing to factories, in contrast to the spring when almost all carmakers stopped production.
“I’m not aware that we have any problems with supply chains,” Wilhelm said.
Broyer of S&P said that the economic impact from “lockdown lites” in France and Germany might be only one-third as severe as it was earlier in the year.
But that relatively optimistic scenario depends in part on how consumers react. One reason for the impressive growth in recent months, Broyer said, was that people were spending the money they had saved while cooped up in their homes during March and April. But they might be more careful as the pandemic drags on and they deplete their bank accounts or start to worry about keeping their jobs.
“Will consumers continue to spend?” Broyer said. “That’s the big unknown.”
Government subsidised furlough programs in Germany, France and other countries have helped prevent mass unemployment, but are beginning to strain national budgets. Government deficits amounted to 9 per cent of gross domestic product in the eurozone in the second quarter, a record increase, up from less than 2 per cent in the first quarter.
The IMF also downgraded its forecasts for Britain’s economy this week, saying GDP would decline 10.4 per cent this year and grow only 5.7 per cent in 2021. That is a deeper contraction and slower recovery than the IMF predicted just three weeks ago, a reflection of soaring COVID-19 cases and proliferating hot spots that are subjecting about a fifth of England’s population, or 11 million people, to the strictest containment measures.
The New York Times
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