Europe could be facing a double-dip recession

Recession is stalking Europe.

Following record GDP growth in the third quarter, the region risks being tipped straight back into recession as sweeping restrictions aimed at curbing a second wave of coronavirus bring a rapid end to its fragile recovery.

EU gross domestic product surged 12.1% between July and September, statistics agency Eurostat said in a statement on Friday. GDP increased 12.7% across the 19 countries that use the euro. The expansions, which followed huge declines in the second quarter, were the biggest since 1995.

But the EU economy remains about 4% smaller than it was at the end of September last year and analysts say the recovery will be short-lived.

Clients sit at a cafe in Bordeaux, southern France, on October 28, 2020, during French President Emmanuel Macron's announcement of new measures aimed at curbing the spread of the Covid-19 pandemic.

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“It is difficult to think of another occasion when such ‘good news’ will have given so little cheer,” chief Europe economist at Capital Economics, Andrew Kenningham said in a research note. “The second wave of coronavirus restrictions is about to push the single currency area into a double-dip recession,” he added.

Governments in Germany and France, the region’s biggest economies, on Wednesday announced nationwide coronavirus lockdowns that will shut non-essential businesses and restaurants for several weeks. Italy has announced a partial lockdown, including shutting bars and restaurants at 6pm, but it could enforce blanket restrictions if the outbreak worsens.

France has already “entered its second dip,” following a record 18.2% surge in third quarter GDP, and the prospects for a significant recovery in 2021 are “darkening sharply,” said ING economist Charlotte de Montpellier. “Unfortunately, [third quarter] figures are ancient history and the recovery is already over,” she wrote in a research note on Friday.

Villeroy de Galhau, the governor of France’s central bank, said at a climate event in Paris on Thursday that he expects another drop in GDP in the fourth quarter, “though hopefully one that is less severe” than in the spring.

Schools and some workplaces will remain open in Germany and France, as will sectors such as construction and manufacturing, which will partially offset the scale of GDP declines.

Another mitigating factor is that economies are already in the doldrums, having failed to fully recover from historic contractions in the second quarter, which means that further falls in GDP will be relatively less severe.

Germany’s economy grew 8.2% between July and September, but is down 4.2% compared to the same quarter last year. In Spain, where GDP grew 16.7% in the third quarter, the economy is 8.7% smaller compared to the same period in 2019. Italy’s economy rebounded 16.1% in the third quarter, but is down 4.7% from the prior year.

Even before lockdowns were announced, business activity in Europe was in decline, according to IHS Markit’s latest Purchasing Managers’ Index.

European Central Bank (ECB) President Christine Lagarde, wearing face mask, attends the 16th Congress of Regions (Congres des Regions) in Saint-Ouen, north of Paris on October 19, 2020. (Photo by GEOFFROY VAN DER HASSELT / AFP) (Photo by GEOFFROY VAN DER HASSELT/AFP via Getty Images)

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Stricter measures have triggered a “clear deterioration” in the near-term economic outlook, European Central Bank President Christine Lagarde told reporters on Thursday.

“Incoming information signals that the euro area economic recovery is losing momentum more rapidly than expected after a strong yet partial and uneven rebound in economic activity over the summer months,” Lagarde said.

She signaled that the ECB stands ready to take action to support the economy and said the central bank is examining all its potential tools. Governments may also be called on to increase spending.

“The dilemma for policymakers is that the most effective way to cushion the blow from another lockdown is by much more generous fiscal support, perhaps including one-off cash transfers to households and businesses,” said Kenningham of Capital Economics.

The EU unemployment rate was stable in September at 8.3%, according to Eurostat, but Kenningham cautioned that the labor market is likely to “come under growing strain in the coming months.”

— Chris Liakos and Julia Horowitz contributed reporting.