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Eurozone economy plunges into double-dip contraction

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The eurozone economy plunged into a double-dip contraction in the last quarter of last year, shrinking 0.7% from the previous three months, but beating economists’ expectations after further restrictions were imposed to contain the coronavirus pandemic.

The decline reversed some of the strong growth of the previous quarter, leaving gross domestic product down 6.8% year-round after the historic recession in the first half of 2020, Eurostat said Tuesday.

This compares to quarterly GDP growth of 1% in the USA and 2.6% in China during the last three months of 2020. The euro area has been hit harder by the spread of the virus and is recovering more slowly than other major economies – it is not expected to return to its pre-pandemic production level until the middle of next year.

China has already rocked the economic impact of Covid-19, increasing by 2.3% during 2020, while the US economy is expected to reach its pre-pandemic scale by the middle of this year after shrinking by 3.5% last year.

However, the euro zone’s contraction in the fourth quarter was more subdued than the 1.2% drop expected by economists polled by Reuters, and better than the European Central Bank’s forecast for a drop of 2.2%.

Nadia Gharbi, economist at Pictet Wealth Management, said the GDP data “better than expected” – as well as last week increase in German inflation – “will relieve pressure on the ECB to add additional stimulus” but she warned that “the outlook is sufficiently uncertain to keep it on the accommodating side”.

The new contraction was also much more subdued than the 11.7% drop the bloc suffered in the second quarter of last year, when the initial coronavirus lockdowns were imposed.

“The eurozone economy had a black eye at the end of last year,” said Florian Hense, economist at Berenberg. “The strengthening of exports and a certain recovery in investment mitigated the decline in private consumption. . . Leave programs have supported disposable income while corporate profits may have declined. “

The stuttering pace of the recovery and the slow pace of progress vaccination programs have prompted many economists to warn that the eurozone is facing a double-dip recession this winter, given the risk of another contraction in the first quarter.

Nicola Nobile, Eurozone Economist at Oxford Economics, said: “While the Eurozone GDP data was better than we expected just a week ago, the near-term outlook for the European economy remains clouded by a difficult health situation in several countries and a disappointing start to the deployment of vaccination. “

Jack Allen-Reynolds, an economist at Capital Economics, said there was a risk that “new, more transferable [coronavirus] the variations, as well as the slowness of vaccination programs, are delaying the lifting of restrictions ”in Europe. He said this would “have a much bigger effect on Mediterranean economies which are more dependent on summer tourism”.

Italy’s economy contracted more than most other eurozone economies at the end of last year, with tightening brakes limiting consumption and activity in much of its service sector, Tuesday showed figures from the national office for national statistics.

Italian production fell 2 percent in the fourth quarter compared to the previous three months. Only Austria’s 4.3 percent decline was worse, while Spain and Germany both recorded slight growth.

Over the past year GDP fell 5 percent in Germany, 8.3 percent in France, 8.8 percent in Italy and 11 percent in Spain – all post-war records.

The EU economy shrank 0.5% in the quarter and 6.4% on the year, Eurostat said Tuesday. The IMF recently valued the UK economy shrank 10% last year.

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