Euro Area: Lockdowns strike unprecedented blow to Eurozone economy in Q2

Euro Area GDP Q2 2020

Euro Area: Lockdowns strike unprecedented blow to Eurozone economy in Q2

The Euro area economy collapsed at a record-breaking pace in the second quarter as severe shutdowns closed businesses and hammered the labor market. In Q2, GDP dived a seasonally-adjusted 12.1% from the previous quarter, following Q1’s 3.6% drop, according to a preliminary estimate released by Eurostat on 31 July. The economy thus contracted at the sharpest pace since the series began in 1995 and broadly matched expectations of a 12.0% fall. Compared with the same quarter of the previous year, seasonally-adjusted GDP plunged 15.0% in Q2, following Q1’s 3.1% decline, also marking the worst reading on record.

The historic contraction came on the back of frozen business and household activity as the full effect of lockdowns adopted by governments 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%, although beat market expectations of a 15.0% crash; while Germany’s GDP contracted 10.1%.

Taking the year as a whole, economic activity is set to be hammered as the pandemic disrupts supply chains, hits tourist flows and suppresses both domestic and external demand. In addition, the outbreak could exacerbate the fragilities within those banking systems which are burdened by a high stock of bad loans, and could also strain debt sustainability in countries with heavy public debt-to-GDP ratios. That said, the recently-approved EU recovery fund should reduce the risks of financial turmoil.

As highlighted by Bert Colijn, Eurozone senior economist at ING:

“The hard part of this recovery is set to start about now. First of all, slightly higher trending new Covid-19 cases increase the risk of reversed reopenings, and we’re already seeing local signs of that. Secondly, from this point on, cautious increases in unemployment and bankruptcies and weak investment will bring to light more characteristics of a general economic slump. These factors are likely to drag on for some time, making a swift recovery to pre-corona levels of GDP out of the question.”

More comprehensive results for the first quarter are scheduled to be released on 14 August and 9 September.

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