Thursday, June 1, 2023

Locks fuel fears of double dip recession in euro area

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Growing restrictions by eurozone countries to tackle the coronavirus pandemic have significantly slowed economic activity, fueling fears the bloc is facing a double dip recession, according to widely watched and timely alternative data indicators.

Travel to retail and hospitality and workplaces, along with consumer confidence and spending, have all been hit in the first weeks of 2021, according to high-frequency activity trackers . These indicators provide a more timely measure of the economy than official statistics, although they are less complete and less reliable.

Bert Colijn, senior eurozone economist at ING, said early data suggested that since the start of the year “activity continues to decline”.

Unlike the sudden and deep shock to the euro area economy last spring when the pandemic first struck, the new spike in infections was “dragging on longer”, leading to a slower but steady decline in l ‘activity which increased’ the risk of such a generous delayed wave of bankruptcies [government and central bank] the support measures do not stay in place, ”said Colijn.

As a result, economists predict that the estimated decline in output in the euro area over the last three months of 2020 – Oxford Economics and Nomura project a contraction of between 1.8% and 2.3% – will be followed by a further decline in the first quarter. 2021 in many of the bloc’s major economies, including Germany and Italy.

This could leave the eurozone in its second recession, defined as two consecutive quarters of negative growth, in less than two years.

Line graph of shopping and entertainment trips (% change from January 3 to February 6, 2020 average, seven-day moving average) showing retail and leisure travel decreased

Katharina Utermohl, Senior European Economist at Allianz, said: “We expect the euro area economy to start 2021 with a double-dip recession, with a second consecutive quarterly contraction of GDP. [in the first quarter] almost certain following the extension and further tightening of Covid-19 restrictions in recent weeks.

Chiara Zangarelli, European economist at Nomura, said the vaccine rollout was “encouraging”, but as lockdowns continued, the outlook for the eurozone’s gross domestic product in the first quarter grew bleaker.

Line graph of percent change from average for January 3 to February 6, 2020, seven-day moving average showing travel to work started slowly after Christmas vacation

Daniela Ordonez, an economist at Oxford Economics, said the drop in activity “may be just the start of a new phase of deteriorating health conditions in the block,” citing the risk that more transmissible variants of the virus could settle down.

The new upsurge in cases and restrictions is hitting the economies of some countries which avoided the worst damage last year.

In Germany and the Netherlands, restrictions are now more severe than in the first phase of the pandemic, resulting in a more marked drop in the number of trips to shops, bars and restaurants than in other European countries.

German consumer spending in the second week of January was 25% lower than in the same period last year, according to Fable Data, which tracks banking transactions. Spending declined in most consumer categories except groceries, the company said.

Line graph of the annual% change in transactions showing that German consumers are restraining their spending in most areas except groceries

The German central bank’s weekly index of economic activity – an experimental measure that draws on high-frequency indicators such as pollution, Google searches and consumer confidence – fell that week for the first time. times since summer.

The proportion of German consumers who said now was not a good time to make major purchases fell from 16% in December to 20% in mid-January, according to data from Morning Consult. Consumer confidence was largely subdued in major eurozone economies in the first two weeks of January, the data showed.

Line graph of the index * showing low consumer confidence in the euro area

The bloc’s manufacturing sector is a positive point. Eurozone industrial production was surprisingly strong in the fall, supported by rising exports, so industrial production should have dampened the economy to some extent in the last quarter of last year.

More recent measurements of industrial production suggest that this resilience has continued into 2021. German truck mileage, an indicator of industrial production, is above levels at the start of January last year, after the usual low in Christmas.

Line graph of the index, 2015 = 100 (seven-day moving average) showing that the mileage of trucks in Germany is higher than the post-holiday period of last year

Economists have warned, however, that the high level of uncertainty about the economic outlook could ultimately trickle down to manufacturing output.

Claus Vistesen, Chief Eurozone Economist at Pantheon Macroeconomics, said: “The recovery of the Eurozone manufacturing sector will slow [the first quarter]. ”


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