EURO AREA ECONOMIC OUTLOOK
The Covid-19 fallout is set to plunge the Eurozone economy into its worst contraction on record this year. Rising unemployment and income losses will hit consumer spending, investment will suffer amid elevated uncertainty, and collapsed foreign demand will hammer exports. A second wave of infections, strained public finances and trade tensions with the U.S. cloud the outlook.
Of our panel of 40+ forecasters, some expect a worse downturn than others. They see the economy contracting anywhere between -6.3% and -11.0% in 2020, before making a modest recovery in 2021. Read more on our outlook for the Eurozone economy below.
In Q2, GDP dived a seasonally-adjusted 12.1% from the previous quarter, following Q1’s 3.6% drop and thus contracting at the sharpest pace since the series began in 1995. Compared with the same quarter of the previous year, seasonally-adjusted GDP plunged 15.0% in Q2, following Q1’s 3.1% decline and also marking the worst reading on record.
The unprecedented contraction came amid business and household activity grinding to a halt as the full effect of lockdowns adopted to contain the pandemic was felt. In terms of individual countries, Spain’s economy collapsed 18.5% over the previous quarter, France’s GDP tumbled 13.8%, Italy’s already-ailing economy slumped 12.4% and Germany’s GDP contracted 9.7%.
Commenting on what lies ahead, analysts at Commerzbank noted:
“The economic recovery in the second half of the year will be largely determined by the further fight against the spread of the pandemic. In recent weeks, infection rates have risen sharply in many euro area countries. A large, second wave of viruses would definitely slow down the recovery of the euro economy. We assume, however, that this time the countries would resort to targeted measures and that there would not be another comprehensive standstill.”
FocusEconomics Consensus Forecast panelists expect the Euro area economy to contract 8.2% in 2020, which is unchanged from last month’s forecast. For 2021, panelists expect the economy to grow 5.6%.
Industrial output expanded a seasonally-adjusted 9.1% over the previous month in June, following May’s 12.3% increase which had marked the strongest jump on record. June’s easing reflected a broad-based moderation in output across the major categories, with production of both capital and durable consumer goods slowing the most. Meanwhile, non-durable consumer goods output picked up from May.
Looking at the individual economies for which data is available, industrial production expanded in 14 countries, while it dropped in two countries. Heavyweights Germany, France, Italy and Spain recorded significant increases again, though production eased in all except Germany where it picked up. At the same time, output dropped in Belgium and Finland. On an annual basis, industrial production plunged 12.3% in June, following May’s 20.4% dive. Lastly, annual average variation in industrial production fell to minus 7.5% from May’s minus 6.7%.
Commenting on the release, George Buckley and Chiara Zangarelli, analysts at Nomura, stated:
“Currently, IP indices in Germany and in the euro area more broadly have recovered to around March levels, while in France, Italy and Spain production is above March levels. Looking forward, euro area industrial production will likely be supported by rising new orders (both domestic and external), as also reported by PMIs: the new orders index for the euro area manufacturing PMI was at its highest since February 2018.”
Overall, our panelists see industrial production plunging 10.5% in 2020, which is up 0.4 percentage points from last month’s forecast. For 2021, panelists see industrial production growing 6.3%.
The flash Eurozone Composite Purchasing Managers’ Index (PMI), produced by IHS Markit, pointed to a slowdown in growth momentum in August. The index declined to 51.6 in August from 54.9 in July, which had marked the strongest reading since June 2018. Despite the drop, the PMI remained above the 50-threshold that distinguishes expanding from contracting business
activity in the Eurozone.
Although the services sector saw activity wane, manufacturing production picked up, with growth hitting an over two-year high. That said, new orders growth eased, particularly those stemming from abroad, hitting service providers the most due to the reintroduction of travel restrictions. Amid still muted demand and business confidence softening from July, firms cut jobs for the sixth consecutive month, being particularly acute in the manufacturing sector. On the price front, although input cost inflation rose for the third month running, firms lowered selling prices amid the lack of pricing power in a subdued demand backdrop.
Assessing the Eurozone’s two largest economies, Germany saw solid, albeit slightly slower, growth in August as did France but the expansion moderated at a more pronounced rate there. Meanwhile, output decreased in the rest of the region.
Commenting on the release, Chris Williamson, chief business economist at IHS Markit, said:
“The eurozone stands at a crossroads, with growth either set to pick back up in coming months or continue to falter following the initial post-lockdown rebound. The path taken will likely depend in large part on how successfully COVID-19 can be suppressed and whether companies and their customers alike can gain the confidence necessary to support growth.”
FocusEconomics Consensus Forecast panelists expect fixed investment to fall 10.9% in 2020, which is up 0.8 percentage points from last month’s forecast. For 2021, panelists see fixed investment increasing 5.8%.
Labor market conditions in the common currency block worsened again in June, when Covid-19 containment measures started being loosened, although data released by Eurostat continues to show just a small portion of the deterioration. The number of unemployed people jumped by 203,000, and the unemployment rate increased to 7.8% in June from 7.7% in May.
Short-time work schemes involving a massive portion of the labor force across the Eurozone has prevented a jump in the unemployment rate so far. Moreover, discouraged people abandoning the active population are further contributing to contained jobless numbers. That, said, looking at the countries with data available, 10 economies saw their unemployment rate increase in June, including Germany, Italy, the Netherlands and Spain. Meanwhile, Ireland and France saw their unemployment rate falling.
Disparities in the labor market among core and periphery countries persist. Spain is the economy in the Eurozone with the highest unemployment rate (15.6%), followed by Greece (15.5%, data refers to April). At the other end of the spectrum, Malta (4.2%), Germany (4.2%) and the Netherlands (4.3%) have the lowest unemployment rates.
Commenting on the release, Bert Colijn, Eurozone senior economist at ING, stated:
“The outlook for unemployment is one of subdued steady increases over the coming months. While economies are reopening, many businesses indicate that they are still looking to lay off employees given the substantially lower output compared to the pre-crisis situation. Besides that, more people will return to the job market, and short-time work schemes will start to come to an end in the second half of the year, causing increased risk of further layoffs. Still, the fact that a labour market shock has not occurred at times of historic output loss has been of help in the current phase of economic recovery, which helps the outlook for GDP in the third quarter.”
FocusEconomics Consensus Forecast panelists expect the unemployment rate to average 9.0% in 2020, which is down 0.2 percentage points from last month’s forecast. For 2021, the panel expects the unemployment rate to average 9.4%.