"I can't believe how fast the second wave has hit," said Katharina Utermöhl, senior economist at Allianz. "We now see growth turning negative in several countries in the fourth quarter — another recession is absolutely possible."
While third-quarter figures are expected to show record growth in eurozone gross domestic product when they are published at the end of this month, a rising number of economists are already cutting their fourth-quarter forecasts into negative territory.
"The shape of the virus resurgence and ensuing business lockdowns and confidence shocks make a double-dip recession the central scenario," said Lena Komileva, chief economist at G+ Economics, adding that Brexit disruption would "further amplify" the economic downturn.
These predictions that the eurozone economy will slide back into recession — albeit a much shallower one than earlier in the year — are bad news for the European Central Bank, which only last month forecast fourth-quarter growth of over 3 per cent. Another setback would imperil the ECB's belief that the eurozone economy will return to its pre-pandemic size by 2022.
Klaas Knot, the Dutch central bank governor and ECB governing council member, said last week: "Many countries are now experiencing a second wave of infections . . . this means recovery now seems further away than we had hoped for. And the economic impact is deepening."
Most analysts expect the ECB to react to a flagging economy that recently slid into deflation by adding an extra €500bn to its emergency bond-buying programme in December.
In a further sign that more monetary easing is likely, Robert Holzmann, the normally conservative head of the Austrian central bank and ECB council member, said: "More durable, extensive or strict containment measures will likely require more monetary and fiscal accommodation in the short run."
The EU's planned €750bn recovery fund is still being debated and so is unlikely to start distributing money for almost a year. In the meantime, national governments "need to bridge the gap", said Nadia Gharbi, economist at Pictet Wealth Management.
Political leaders still hope to avoid the kind of strict lockdowns that caused a record postwar recession in the second quarter. "Politicians have learnt their lessons from the first wave," said Jörg Krämer, chief economist at German lender Commerzbank. "A second undifferentiated lockdown is not to be expected because of the immense economic costs."
Yet with daily infection levels in many countries rising above the previous peak of the pandemic in March and April and hospital beds filling up again, governments may have little choice but to tighten restrictions even further.
Even without full-scale lockdowns, economists say the mere fact that the coronavirus infection rate is shooting up is likely to hit consumer activity, prompting more people to stay home and spend less money — just as they did when the pandemic first hit.
"If people get scared and stay at home, then precautionary savings will go up again and that could push us into another negative quarter of GDP," said Erik Nielsen, chief economist at UniCredit. "With these types of shocks it hardly takes anything to push us into negative territory."
A recent FT analysis of Google community mobile data found that after rising for months, footfall in cafés, restaurants, retail and leisure venues started in early October to decline again in many European cities, including Paris, London, Amsterdam, Berlin and Madrid.
Central bankers are watching this high-frequency data closely for signs of how the second wave of infections is affecting the economy. "Demand effects are dominating at the moment, and labour-intensive service sectors are being very badly affected," said an ECB governing council member. "A double-dip is possible."
That spells trouble for countries like France, Spain and Portugal, which have large service sectors requiring a high level of social interaction — such as tourism and leisure. Allianz last week slashed its Spanish and French economic forecasts, predicting that instead of growth they would contract by 1.3 per cent and 1.1 per cent in the fourth quarter, respectively.
Some weakness was already evident in last month's IHS Markit survey of purchasing managers, which found for the first time since May that a majority of eurozone services businesses were reporting a sharp drop in activity from the previous month.
On a brighter note, the same survey found activity had improved in the manufacturing sector — boosted by a rebound in global trade, particularly in exports to China. In another upbeat sign, German factory orders outstripped expectations by rising 4.5 per cent in August.
Carsten Brzeski, chief eurozone economist at ING, said some German manufacturing companies were privately boasting they expected to have "the best quarter for some time" in the final three months of this year. "This could just be enough to avoid a double-dip," he said.
- Financial Times
