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Europe’s second wave raises menace of double-dip recession

Europe’s financial system is sliding in direction of a double-dip recession, with economists warning that rising coronavirus infections and contemporary authorities restrictions on individuals’s motion are prone to reduce brief the area’s latest restoration.

Germany, France, the UK, Italy, Spain and the Netherlands have all introduced measures in the past week to comprise the second wave of Covid-19 infections, with extra anticipated within the coming days.

On Sunday, Belgium introduced the closure of all bars and cafés for 4 weeks, whereas Switzerland widened its mandate for mask-wearing. France enforce a night curfew in Paris and different cities from Saturday.

The measures observe a pointy rise in case numbers, with quite a few European nations reporting document new each day an infection figures over the weekend.

“I can’t believe how fast the second wave has hit,” mentioned 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 anticipated to indicate document progress in eurozone gross home product when they’re printed on the finish of this month, a rising variety of economists are already slicing their fourth-quarter forecasts into unfavorable territory.

“The shape of the virus resurgence and ensuing business lockdowns and confidence shocks make a double-dip recession the central scenario,” mentioned Lena Komileva, chief economist at G+ Economics, including that Brexit disruption would “further amplify” the financial downturn.

These predictions that the eurozone financial system will slide again into recession — albeit a a lot shallower one than earlier within the yr — are unhealthy information for the European Central Bank, which solely final month forecast fourth-quarter progress of over three per cent. Another setback would imperil the ECB’s belief that the eurozone financial system will return to its pre-pandemic measurement by 2022.

‘We’ll see you one other time’ — the Dutch authorities this week ordered bars and eating places to shut at 10pm © Sem van der Wal/EPA-EFE/Shutterstock
A abandoned classroom in a closed college in Prague — the Czech Republic has been one of many nations hardest hit by the second wave of infections © Petr David Josek/AP

Klaas Knot, the Dutch central financial institution governor and ECB governing council member, mentioned final 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 anticipate the ECB to react to a flagging financial system that just lately slid into deflation by including an additional €500bn to its emergency bond-buying programme in December. 

In an extra signal that extra financial easing is probably going, Robert Holzmann, the usually conservative head of the Austrian central financial institution and ECB council member, mentioned: “More durable, extensive or strict containment measures will likely require more monetary and fiscal accommodation in the short run.”

The EU’s deliberate €750bn recovery fund continues to be being debated and so is unlikely to begin distributing cash for nearly a yr. In the meantime, nationwide governments “need to bridge the gap”, mentioned Nadia Gharbi, economist at Pictet Wealth Management.

Line chart of Eurozone services purchasing managers' index (below 50 = contraction in activity) showing September's PMI report showed signs of a 'double dip' in the economy

Political leaders nonetheless hope to keep away from the type of strict lockdowns that brought about a document postwar recession within the second quarter. “Politicians have learnt their lessons from the first wave,” mentioned 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 earlier peak of the pandemic in March and April and hospital beds filling up once more, governments might have little selection however to tighten restrictions even additional.

Even with out full-scale lockdowns, economists say the mere proven fact that the coronavirus an infection price is taking pictures up is prone to hit shopper exercise, prompting extra individuals to remain dwelling and spend much less cash — simply 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,” mentioned Erik Nielsen, chief economist at UniCredit. “With these types of shocks it hardly takes anything to push us into negative territory.”

A latest FT analysis of Google group cellular knowledge discovered that after rising for months, footfall in cafés, eating places, retail and leisure venues began in early October to say no once more in many European cities, together with Paris, London, Amsterdam, Berlin and Madrid.

Central bankers are watching this high-frequency knowledge carefully for indicators of how the second wave of infections is affecting the financial system. “Demand effects are dominating at the moment, and labour-intensive service sectors are being very badly affected,” mentioned an ECB governing council member. “A double-dip is possible.”

That spells bother for nations like France, Spain and Portugal, which have giant service sectors requiring a excessive degree of social interplay — corresponding to tourism and leisure. Allianz final week slashed its Spanish and French financial forecasts, predicting that as an alternative of progress they’d contract by 1.three per cent and 1.1 per cent within the fourth quarter, respectively. 

Latest coronavirus information

Follow FT’s dwell protection and evaluation of the worldwide pandemic and the quickly evolving financial disaster here.

Some weak point was already evident in final month’s IHS Markit survey of buying managers, which discovered for the primary time since May {that a} majority of eurozone companies companies have been reporting a sharp drop in exercise from the earlier month. 

On a brighter notice, the identical survey discovered exercise had improved within the manufacturing sector — boosted by a rebound in world commerce, notably in exports to China. In one other upbeat signal, German manufacturing facility orders outstripped expectations by rising 4.5 per cent in August. 

Carsten Brzeski, chief eurozone economist at ING, mentioned some German manufacturing firms have been privately boasting they anticipated to have “the best quarter for some time” within the closing three months of this yr. “This could just be enough to avoid a double-dip,” he mentioned.

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