The bar chart of Eurozone GDP, the percentage change from the previous quarter, shows that growth in the Eurozone is likely to slow after a recovery in the third quarter

Europe's second wave carries the risk of a double-dip recession

The European economy is sliding towards a double-dip recession. Economists warn that rising coronavirus infections and new government restrictions on the movement of people are likely to shorten the region's recent recovery.

Germany, France, Great Britain, Italy, Spain and the Netherlands announced measures last week to contain the second wave of Covid-19 infections. A night curfew was put in place on Paris and a number of other French cities on Saturday, while the Italian government is expected to announce new curbs on Sunday.

A number of European countries reported new daily infection numbers over the weekend.

"I can't believe how quickly the second wave hit," said Katharina Utermöhl, Senior Economist at Allianz. "We are now seeing fourth quarter growth turning negative in several countries – another recession is entirely possible."

While record growth in Eurozone gross domestic product is expected for the third quarter when they are released at the end of this month, more and more economists are already lowering their forecasts for the fourth quarter into negative territory.

"The shape of the resurgence of the virus and the resulting business closings and confidence shocks make a double-dip recession the central scenario," said Lena Komileva, chief economist at G + Economics, adding that the Brexit disruption will drive the economic downturn " further strengthen ".

Those predictions that the eurozone economy will slide back into recession – albeit much flatter than earlier this year – are bad news for the European Central Bank, which only last month forecast growth of over 3 percent in the fourth quarter . Another setback would jeopardize the ECB's belief that the eurozone economy will return to pre-pandemic size by 2022.

"See you another time" – the Dutch government ordered this week that bars and restaurants should close at 10 p.m. © Sem van der Wal / EPA-EFE / Shutterstock


An abandoned classroom in a closed school in Prague – the Czech Republic was one of the countries hardest hit by the second wave of infections. © Petr David Josek / AP

Klaas Knot, the Dutch central bank governor and member of the Governing Council of the ECB, said last week: “Many countries are now experiencing a second wave of infections. . . This means the recovery now seems further away than we hoped it would be. And the economic impact is deepening. "

Most analysts believe the ECB will respond to a weakening economy that recently slipped into deflation by adding another EUR 500 billion to its emergency bond purchase program in December.

In yet another sign that more monetary easing is likely, Robert Holzmann, the normally conservative head of Austria's central bank and governing council member, said: "More permanent, sweeping, or tighter containment measures will likely require more financial and fiscal precautions anytime soon. "

The EUR 750 billion recovery fund planned by the EU is still under discussion and it is unlikely to start distributing funds for almost a year. In the meantime, national governments need to "fill the gap," said Nadia Gharbi, an economist at Pictet Wealth Management.

The line chart of the Eurozone purchasing managers' index of services (below 50 = decline in activity) with the September PMI report showed signs of a "double decline" in the economy

Political leaders are still hoping to avoid the kind of tight lockdown that led to a record post-war recession in the second quarter. "The politicians have learned their lessons from the first wave," said Jörg Krämer, chief economist at the German Commerzbank. "A second undifferentiated blocking is not to be expected due to the immense economic costs."

With daily infection rates rising above the previous peak of the pandemic in March and April in many countries and hospital beds becoming full again, governments may have no choice but to tighten restrictions even further.

Even without a full lockdown, economists say the mere fact that the coronavirus infection rate is increasing is likely to impact consumer activity and encourage more people to stay home and spend less money – just like the first pandemic.

"If people get scared and stay at home, the retirement savings will rise again and that could drive us into another negative quarter of GDP," said Erik Nielsen, chief economist at UniCredit. "With these types of shocks, it doesn't take much to force us into negative territory."

A recent FT analysis of the Google community's mobile data found that after months of growth, visitor numbers to cafes, restaurants, retail and leisure establishments declined in many European cities, including Paris, London, Amsterdam, Berlin and Madrid, in early October .

Central bankers are closely monitoring this high-frequency data for signs of how the second wave of infections is affecting the economy. "The demand effects are currently dominating and the labor-intensive service sectors are very badly affected," said a member of the Governing Council. "A double dip is possible."

This means trouble for countries like France, Spain, and Portugal, which have large service sectors that require high levels of social interaction – like tourism and leisure. Allianz slashed its Spanish and French economic forecasts last week, forecasting that they would contract 1.3 percent and 1.1 percent respectively in the fourth quarter instead of growth.

Some weaknesses were already evident in the IHS Markit survey of purchasing managers last month, in which, for the first time since May, it was found that the majority of service companies in the euro area saw a sharp drop in activity from the previous month.

On the positive side, manufacturing activity has improved – fueled by a recovery in world trade, particularly exports to China. In another positive sign, German factory orders exceeded expectations and rose 4.5 percent in August.

Carsten Brzeski, ING's chief eurozone economist, said some German manufacturing companies had privately boasted that they had “the best quarter in a while” in the last three months of this year. "This might just be enough to avoid a double dip," he said.