Euro zone in double-dip recession, recovery risks to downside

Euro zone in double-dip recession, recovery risks to downside

The euro zone economy is in double-dip recession amid lockdown restrictions due to a resurgence in coronavirus cases, according to a Reuters poll of economists, who said the risks to their already weak outlook was skewed more to the downside. As Reuters reports, given delays to the European Union’s vaccine roll-out and concerns about new coronavirus variants supporting current lockdowns, stalled economic activity and rising unemployment pose a serious threat to any expected recovery.

Only last month the economy was predicted to make a sharp recovery and grow 0.6% this quarter after shrinking 0.7% in Q4.

But those views turned sour in the Feb. 8-11 poll of over 75 economists as a spike in COVID-19 cases necessitated renewed restrictions on economic and social activity.

The euro zone economy was forecast un the latest poll to contract 0.8% this quarter. That was after GDP in the euro area contracted in the first two quarters of last year - making current expectations a double-dip recession.

Over three-quarters, or 28 of 36 economists responding to an additional question, said the risks to their growth outlook were skewed to the downside.

“With lockdowns extended into the new year, it really feels like it is darkest before dawn in the euro zone. In the first quarter, GDP is all but certain to contract again and the question is now by how much,” said Marcel Klok, senior economist at ING.

“The combination of lockdowns and vaccinations will allow for more substantial reopening of economies over the course of the second quarter. This will then also mark the start of the recovery of the euro zone economy.”The economy was forecast to grow 2.1% in the second quarter compared with 2.3% predicted last month. It was then expected to expand 1.9% and 1.2% in Q3 and Q4, respectively, compared to 1.9% and 1.0% forecast in January.

After shrinking 6.9% in 2020 on an annual basis, the euro zone economy was seen growing 4.3% this year and 4.0% next, compared to 4.5% and 3.9% predicted previously.

“The virus situation has deteriorated in a number of countries in the euro zone and the vaccine roll-out has not been as smooth as we had hoped. We are hopeful it will pick up pace, but as things stand, the risks are that it remains too slow to allow governments to lift restrictions,” said Andrew Kenningham, chief Europe economist at Capital Economics.

“Our working assumption is that some restrictions will start to be lifted in April and that the bulk of the economically damaging restrictions will be lifted in May/June.”

Europe’s recovery from a recession induced by the COVID-19 pandemic has been somewhat delayed but should pick up pace from mid-year, European Central Bank President Christine Lagarde said.

When asked if euro zone GDP would return to pre-crisis levels by mid-2022 as the ECB has projected, almost 65%, or 22 of 34 economists, said yes.

“The vaccine is the ultimate multiplier for investment and private consumption. Getting the vaccination campaign on track is key as it would allow for a return to pre-crisis levels by mid-2022,” said Ludovic Subran, chief economist at Allianz.

On monetary policy, when asked if the ECB would try to control the yield curve, 21 of 35 economists said no.

“The ECB will not announce a target range for a long-term yield, simply because there is no euro long-term yield. But the ECB will try to curb any substantial increases in yield by its forward guidance and its asset purchase programme,” said Jens-Oliver Niklasch, economist at the LBBW bank.


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