Double-dip recession beckons in Europe

13 January, 2021 12:00 AM printer

LONDON: The euro-area economy is poised to shrink again at the start of this year as the resurgent pandemic plunges the region into a double-dip recession.

Analysts at banks including JPMorgan Chase & Co. and UBS Group AG are downgrading forecasts to account for renewed lockdowns—in some places tougher than ever—and the prospect that the new coronavirus variant ravaging the U.K. will do the same on the continent, report agencies.

Add vaccination delays to trade disruptions because of Brexit, and the scene is set for a second straight quarter of falling gross domestic product. That would echo the downturn at the start of 2020, even if less severe, and increase pressure on indebted governments and the European Central Bank, which meets to set policy next week, to provide more financial support.

High-frequency indicators show that while euro-zone economic activity picked up in the first week of this year as people returned to work, it’s far lower than a year ago.

Lockdowns and slow vaccinations “aren’t helping,” said Katharina Utermoehl, senior economist at Allianz SE. “The drawn-out restrictions, which started rather lightly, are the bigger problem.”

Bloomberg Economics now says the euro-area economy will shrink about 4 per cent in the first three months of 2021, based on “pessimistic” assumptions about how long restrictions will last. It previously forecast growth of 1.3 per cent.

JPMorgan, which reckons the economy suffered a massive 9 per cent contraction in the fourth quarter of 2020, now projects a 1 per cent downturn in the first quarter of this year compared with its earlier forecast for 2 per cent growth.

UBS expects a first-quarter drop of 0.4 per cent, compared with its earlier expectation for 2.4 per cent growth. Goldman Sachs Group Inc. predicts a slight contraction, with major uncertainty and “risks skewed further toward the downside.”

Brexit is having an impact too. ING Groep NV says that in addition to the turmoil from the virus, exports could weaken again following the year-end boost of euro-zone companies rushing to ship products to the U.K. before a possible no-deal outcome to trade talks.

The Dutch bank expects zero growth “at best” in the next three months, and said the economy won’t return to its pre-pandemic level until well into 2023.“2021 is starting on the wrong foot,” Chief Economist Peter Vanden Houte said in a report. “The start of the vaccination campaign has been slow and sometimes chaotic.”

There have been sizable divergences among member states. Germany has benefited from its greater reliance on manufacturing, with factories staying open while government-mandated lockdowns shut non-essential shops and much of the hospitality sector.

Bloomberg Economics says Europe’s biggest economy probably managed to post some growth in the fourth quarter. German Chancellor Angela Merkel said Tuesday that its strict curbs may need to stay in place into late March.