Resurgent virus seen as biggest threat to euro zone economy

BENGALURU • The resurgence in coronavirus cases is the biggest threat to the recovering euro zone economy, according to a Reuters poll of economists, who say growth and inflation are more likely to create negative surprises over the coming year than positive ones.

Around 30 million people have been infected by the virus globally, and more than 900,000 have died, triggering some of the deepest recessions on record and breaking up supply chains around the world.

While a strong euro zone rebound is under way as lockdown restrictions have been eased and businesses reopened, France and Spain, among others in the 19-member bloc, are grappling with a virus resurgence.

That is raising the possibility of renewed restrictions and lockdowns.

“A flaring in the number of Covid-19 infections over the summer months has made it very clear that if there is no effective vaccine, growth will be handicapped,” said ING chief economist Peter Vanden Houte.

“There is also the fear of negative second-round effects once the current recession starts to be reflected in a swelling number of the unemployed… (and) we cannot exclude higher precautionary savings dampening consumption.”

A return to where the economy was before the outbreak earlier this year is not expected until at least end-2022.

That comes despite the European Central Bank’s (ECB) planned €1.35 trillion (S$2.2 trillion) of pandemic-related additional asset purchases and a historic €750 billion recovery fund from the European Union due to kick in next year.

But the concern is that no new stimulus is on the horizon, other than national governments extending worker furloughs put in place early this year as they struggle with soaring debt.

Euro zone unemployment, which finally declined just before the coronavirus struck to where it was before the last financial crisis more than a decade ago, is already rising.

Ninety per cent of economists, or 37 of 41 who responded to an additional question in the Sept 15 to 17 Reuters poll, said a further surge in infections was the biggest risk to the euro zone economy over the coming year.

The remaining handful of respondents cited a strong euro, and no trade deal reached between the EU and Britain when the Brexit transition period expires at the end of the year.

The Reuters poll of over 80 economists pointed to 8.1 per cent quarterly growth this quarter, by far the strongest on record, following a historic 11.8 per cent contraction in the second quarter. That forecast was unchanged from last month’s poll.

Quarter-on-quarter growth is then set to slow sharply to a still-strong 2.5 per cent in the fourth quarter, but down from the 3 per cent predicted last month.

In a worst-case scenario, the economy was forecast to grow 4.5 per cent in the third quarter, compared to 4 per cent in the last poll. The worst case for the fourth quarter is now just a 0.4 per cent contraction, versus a 2 per cent fall in the August poll.

But over 80 per cent of respondents said the risks to both their euro zone growth and inflation forecasts were skewed more to the downside over the coming year.

“The virus is making new waves and the economy is still far from operating at pre-Covid-19 levels in most sectors,” said Mr Elwin de Groot, head of macro strategy at Rabobank, who expects no growth in the final three months of this year.

“But as governments are likely to shift towards more targeted measures – rather than blanket ones – the ‘true’ economic damage may reveal itself only in the next quarters.”

Most economists have remained pessimistic about the bloc’s growth outlook since the pandemic struck, and some have lowered their inflation views even further from last month.

The consensus for this quarter was 0.1 per cent versus 0.3 per cent predicted a month ago, followed by stagnation the next quarter. On a full-year basis, results were broadly in line with the ECB’s staff projections, at 0.4 per cent for this year, 1 per cent for next year and 1.3 per cent for 2022.


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