Euro Area: Third estimate confirms lockdowns plunged Eurozone economy to series low in Q1

Euro Area GDP Q1 2020

Euro Area: Third estimate confirms lockdowns plunged Eurozone economy to series low in Q1

A third estimate confirmed that the Eurozone economy contracted sharply in the first quarter of this year amid widespread lockdowns in March, after marginally expanding in Q4 2019. GDP dived a seasonally-adjusted 3.6% in Q1 from the previous quarter (previously reported: -3.8% quarter-on-quarter s.a.), contrasting Q4’s 0.1% uptick and thus logging the sharpest contraction since the series began in 1995. Compared with the same quarter of the previous year, seasonally-adjusted GDP plunged 3.1% in Q1 (previously reported: -3.2% year-on-year), swinging from Q4’s 1.0% increase and marking the worst reading since the third quarter of 2009.

The contraction came on the back of frozen business and household activity in the last two weeks of March due to measures adopted by governments to contain the pandemic. Household spending slumped 4.7% over the previous quarter, swinging from Q1’s 0.1% uptick, amid postponed spending decisions, plunging consumer confidence, falling employment and gloomy economic prospects. Moreover, fixed investment tumbled 4.3% (Q4: +5.0% qoq s.a.), due to widespread businesses closures and a highly uncertain economic outlook. Additionally, government consumption fell (Q1: -0.4 qoq s.a.; Q4: +0.3% qoq s.a.) while destocking added 0.3 percentage points to growth, as vanishing demand translated into crammed warehouses.

Similarly, the external sector dragged on growth. Exports plummeted in Q1 (Q1: -4.2% qoq s.a.; Q4: +0.1% qoq s.a.), again due to businesses closures domestically and lockdowns abroad and amid a downbeat global trade environment, while imports also fell notably, although at a softer pace than foreign sales (Q1: -3.6% qoq s.a.; Q4: +1.9% qoq s.a.).

In terms of specific countries, the sharpest contractions were recorded in France and Italy (Q1: -5.3% qoq s.a.), followed closely by Spain (Q1: -5.2% qoq s.a.). Meanwhile, Germany’s economy dropped at a considerably softer pace (Q1: -2.2% qoq s.a.), after having dipped in the previous quarter.

Commenting on the release, Bert Colijn, Eurozone senior economist at ING, stated:

“The lockdown recession is in full force and the question now is when it will go away. The second quarter will show even weaker GDP and jobs figures, but it is all about the recovery in consumption and investment as the lockdowns are gradually lifted. As savings rates have gone up, the question is whether consumers can and want to spend again over the summer months and whether businesses can and want to invest again. As job losses continue to come in and revenues remain subdued even after restrictions are lifted, this is no done deal. A V-shaped recovery is therefore not in the making, but a wide variety of scenarios are still in play.”

The pandemic will leave a desolate economic landscape in its path, ravaging investment activity and household spending amid soaring unemployment figures. Moreover, the tourism sector will be hard hit, depressing external demand. Sharply deteriorating public finances and worsening bank credit quality pose further downside risks.

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