Double dip looms for eurozone

The ‘Big Four’ have seen a surge in output but new lockdowns will put that into reverse, writes Tom Rees

E UROPE’S biggest e c o n o mie s rebounded sharply in the third quarter but are expected to shrink again as coronavirus cases rise and restrictions on businesses tighten.

German GDP rose by 8.2pc from July to September – the biggest jump since records began in 1970. Economic activity in France bounced back by 18.2pc over the same period, but remained 4.3pc lower than the year before.

Meanwhile, the Spanish economy expanded by 16.7pc in the three months after shrinking 17.8pc in the second quarter, but was still down 8.7pc from

‘There is unfortunately still no evidence that you can simply turn on and off an economy like a light switch’

last year, government figures showed. The ECB has indicated it will inject more economic stimulus in December, acknowledging the growing threat.

Bruno Le Maire, the French economy minister, insisted the country would stay mired in recession for the rest of the year, projecting an 11pc contraction for 2020 – worse than previously forecast. “The economy has a considerable capacity to rebound,” he said. “As soon as 2021, we will be able to get growth figures that are good growth figures.”

Nadia Calvino, his Spanish counterpart, warned of “great uncertainty, both on a European and on a global level”. The International Monetary Fund expects the Spanish economy to shrink as much as 12.8pc this year.

Carsten Brzeski, of ING, cautioned that “a double dip looks unavoidable” in Germany. “There is unfortunately still no evidence that you can simply turn on and off an economy like a light switch without causing more structural damage, maybe even a short circuit,” he said.

Flares and Molotov cocktails have been lobbed this week in the streets of Milan – the Italian city that heralded the arrival of Covid-19 in Europe eight months ago.

As cases rocketed in Lombardy once again, police fired tear gas to disperse the angry crowds chanting “freedom, freedom, freedom” and tensions boiled over across the Continent from Berlin to Barcelona.

New eurozone GDP figures yesterday showing a far brisker rebound in the third quarter than expected will be of little comfort to protesters railing against the arrival of lockdown 2.0 and more economic pain.

The data revealing a record 12.7pc quarter-on-quarter surge in output came at the end of a dramatic week when the eurozone’s biggest economies returned to tough lockdowns, stock markets tumbled and rate-setters lined up another monetary bazooka.

“It is difficult to think of another occasion when such ‘good news’ will have given so little cheer,” says Andrew Kenningham, chief Europe economist at Capital Economics.

Few economists are upgrading their forecasts despite the buoyant growth numbers from the eurozone “Big Four” of Germany, France, Italy and Spain. Eurozone GDP was down by 4.3pc in the third quarter compared with a year earlier, but that is likely to slip back again.

Bert Colijn, the ING eurozone economist, calls the third quarter pick-up “bittersweet” as new lockdowns will make “a double dip unavoidable”.

“The second wave of coronavirus restrictions is about to push the single currency area into a double-dip recession,” warns Kenningham. He says the bumper growth in the third quarter would have signalled an “almost V-shaped recovery” were it not for the second wave setback.

The strongest recoveries were in countries hardest hit by the first wave, with GDP rising in a “mechanical” rebound as economies reopened. Spain, which suffered the biggest first-half plunge in GDP of any major economy, enjoyed a 17pc surge in output, while Italian GDP rose by 16pc.

However, Spain’s reliance on social consumption – face-to-face activities from bars to hairdressers – means it is likely to be among the hardest hit again, analysts warn.

“Even though no country will be spared in Europe, Spain especially should brace itself for a significant second blow to its economy given its economic structure,” says Maartje Wijffelaars, the Rabobank economist.

While health experts warn the second wave of infections could be even worse than the first, economists expect lockdown 2.0 to have a smaller impact on GDP.

New lockdowns in France and Germany are stricter than many forecasters anticipated but will keep parts of the economy less likely to encourage the spread of Covid open.

Factories, shops and schools will not close in Germany, while France has more stringent rules that are closer to a full lockdown. Businesses are also more likely to have learnt how to operate better under restrictions.

While the GDP hit may be smaller than the first lockdown, analysts worry that every wave increases the more permanent damage to economies. Not only does a second wave threaten to lift unemployment and business failures, prolonging the economy’s recovery, but it could also entrench consumer and business caution if they fear multiple waves of the virus.

Wijffelaars warns the recovery from the second downturn will “take longer than that of the first dip. As long as there is no vaccine available, governments will have to find a balance between opening up economies and keeping the virus in check.”

Another lockdown will mean more unprecedented support from governments and rate-setters. The European Central Bank resisted more stimulus at Thursday’s policy meeting but committed to returning with more help in December. The rate-setters will need to act to stop dangerous deflation becoming entrenched, with new figures yesterday revealing prices fell for a third straight month in October.

ECB president Christine Lagarde opened the door to an interest rate cut deeper into negative territory by announcing that policymakers are already looking at using all of the tools in the bank’s depleted war chest.

“With inflation remaining very weak and GDP set to fall again in the fourth quarter, the ECB has started to work on a new package of monetary stimulus,” says Colijn. “Not what you’d usually expect when an economy just grew by 12.7pc, but this is the reality of a Covid economy.”

‘It is difficult to think of another occasion when such “good news” will have given so little cheer’