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Resurging coronavirus biggest threat to euro zone economy – economists

FILE PHOTO: The spread of the coronavirus disease (COVID-19) in Germany

By Shrutee Sarkar

BENGALURU (Reuters) – 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. COVID-19 global tracker https://www.reutersagency.com/en/coverage/covid-19-global-tracker

While a strong euro zone rebound is underway 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 Peter Vanden Houte, chief economist at ING.

“There is also the fear of negative second-round effects once the current recession starts to be reflected in a swelling number of 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 planned 1.35 trillion euros of pandemic-related additional asset purchases and an historic 750 billion euro 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 percent of economists, or 37 of 41 who responded to an additional question in the Sept. 15-17 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 United Kingdom when the Brexit transition period expires at the end of the year.

(GRAPHIC: Reuters Poll: Euro zone economic outlook – https://fingfx.thomsonreuters.com/gfx/polling/jznpnlbqopl/Reuters%20Poll-%20EZ%20economic%20outlook%20-%20September%202020.PNG)

The Reuters poll of over 80 economists pointed to 8.1% quarterly growth this quarter, by far the strongest on record, following an historic 11.8% contraction in Q2. That forecast was unchanged from the August poll.

Quarter-on-quarter growth is then set to slow sharply to a still-strong 2.5% in Q4, but down from 3.0% predicted last month.

In a worst-case scenario, the economy was forecast to grow 4.5% in Q3, compared to 4.0% in the last poll. The worst-case for Q4 is now just a 0.4% contraction versus a 2.0% fall in the August poll.

But over 80% 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 levels in most sectors,” said 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 only reveal itself 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% versus 0.3% 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% for 2020, 1.0% for 2021 and 1.3% for 2022.

(GRAPHIC: Reuters Poll: Euro zone economic growth and inflation outlook – https://fingfx.thomsonreuters.com/gfx/polling/yzdvxqdjgpx/Reuters%20Poll-%20ECB%20and%20EZ%20outlook.PNG)

(Reporting by Shrutee Sarkar and Richa Rebello; Polling by Hari Kishan and Nagamani Lingappa; Editing by Ross Finley and Alexandra Hudson)

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