Euro zone recovery at serious risk as COVID-19 cases rise

BENGALURU (Reuters) – The euro zone’s economic recovery is at serious risk of stalling as a resurgent coronavirus sweeps through Europe, according to economists in a Reuters poll who kept their already weak growth and inflation forecasts for 2021 modest at best.

Many euro zone countries were severely hit at the start of the pandemic. Strict lockdowns plunged the economy into the deepest recession on record, despite unprecedented fiscal and monetary easing, leaving many thousands unemployed.

The Oct. 15-22 Reuters poll found nearly 90% of economists, or 48 of 55, said there was a high or very high risk the resurgence in cases now underway across Europe would halt that nascent euro zone recovery.

“The initial rebound from the lockdown was always going to run out of steam but the second wave threatens to push some countries into another recession and will place the euro zone recovery on hold,” said Andrew Kenningham, chief Europe economist at Capital Economics.

“There is a growing risk of more severe lockdowns in the near term; these would cause a double-dip recession, although any contraction in GDP would not be as deep as in the first wave.”

After contracting 11.8% in Q2, the economy was expected to have grown 8.9% in Q3, better than 8.1% predicted last month, and by far the strongest performance on record if realised.

But growth in the current quarter will slip to 2.1%, lower than the 2.5% previously expected and substantially weaker than the 2.8% forecast in May when lockdowns were eased after the first wave of infections.

While only one economist officially forecast a contraction for the current quarter, several said this was highly likely as restrictions become tighter over the winter.

Reuters analysis showed over 60% of common contributors to the October and September polls either lowered their quarterly GDP forecasts until end-2021 or left them unchanged.

On an annual basis, the economy was expected to shrink 8.0% this year, barely moved from the -8.1% September median and the International Monetary Fund’s projection of -8.3%.

It was then forecast to grow 5.4% in 2021, down a notch from September’s 5.5% expectation but better than the IMF’s 5.2%. For 2022 the consensus remained unchanged from last month at 2.7%.

The wider poll showed a chilling winter for the job market, which up until now has been shielded by government furlough schemes.

Over 60% of respondents, or 31 of 53, said the bloc’s jobless rate would not peak for at least six months. Only two said it already had.

The unemployment rate, which rose to 8.0% in August from 7.3% in February, in response to a separate question was forecast to top out at 9.4% – lower than the 10.3% recorded after the global financial crisis more than a decade ago and well below the peak of 12.1% in 2013 during the euro zone sovereign debt crisis.

But the range of forecasts was wide, from 8.1% to 13.4%.

Rising unemployment is likely to put further downward pressure on inflation, which has been negative for two months. Only a handful of economists predicted inflation would touch the European Central Bank’s target of just below 2% before end-2022.

The ECB is forecast to increase the size of its pandemic-related bond purchases by an additional 400 billion euros on top of the 1.35 trillion euros already announced.

“You are in a situation where you have increased downside risks and where inflation is already way too low,” said Spyros Andreopoulos, senior European economist at BNP Paribas.

“That we think will force the ECB to be more pre-emptive and that is why we expect them to announce an increase in the PEPP (Pandemic Emergency Purchases Programme) in December.”

The ECB is expected to keep its deposit rate at -0.50% and refinancing rate at zero until at least 2023.