Euro Area: Third estimate confirms lockdowns struck unprecedented blow to Eurozone economy in Q2
According to a third estimate, the Eurozone economy shrank 11.8% in seasonally-adjusted quarter-on-quarter terms in Q2 (previously reported: -12.1% s.a. qoq), following Q1’s 3.7% slump, 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 14.7% in Q2 (previously reported: -15.0% year-on-year), following Q1’s softer 3.2% decrease and marking the worst reading on record.
The contraction came on the back of frozen business and household activity due to measures adopted by governments to contain the pandemic. Household spending slumped 12.4% over the previous quarter in Q2 (Q1: -4.5% s.a. qoq), amid deferred spending decisions, abysmal consumer confidence, falling employment and a highly uncertain economic outlook. Moreover, fixed investment tumbled 17.0% (Q1: -5.2% s.a. qoq), due to widespread businesses closures and highly uncertain demand prospects. Additionally, government consumption fell (Q2: -2.6% s.a. qoq; Q1: -0.7% s.a. qoq) while destocking added 0.1 percentage points to growth, as vanishing demand translated into growing inventories.
Similarly, the external sector dragged on growth. Exports plummeted in Q2 (Q2: -18.8% s.a. qoq; Q1: -3.9% s.a. qoq), again due to businesses closures in the region and global lockdowns, and amid a downbeat global trade environment. Imports also fell notably, although at a somewhat softer pace than foreign sales (Q2: -18.0% s.a. qoq; Q1: -3.2% s.a. qoq).
In terms of specific countries, the varying paces of contraction broadly reflected the severity of domestic lockdowns. The sharpest contraction was recorded in Spain (Q2: -18.5% s.a. qoq), followed, at some distance, by France (Q2: -13.8% s.a. qoq) and Italy (Q2: -12.8% s.a. qoq). Meanwhile, Germany’s economy dropped at a considerably softer pace (Q2: -9.7% s.a. qoq).
Commenting on the release, Bert Colijn, senior Eurozome economist at ING, stated:
“At the end of April, real-time indicators of activity reached a turning point and then started to recover as economies cautiously started to reopen. And while the recovery has lost speed in August, according to early survey data, the bounce back from the April lows will be enough to see a whopping GDP growth rate in 3Q. Those 3Q numbers will therefore not tell us all that much about the growth dynamics in the quarter itself, but more about the jump in activity on the back of reopening economies, which happened in 2Q.”
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 sour 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 risk of financial turmoil.