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The drop in Eurozone GDP: the worst is yet to come

5/6/2020

Eurozone DP shrank by -3.8% in the Q1 2020, on a quarterly basis. The economic contraction in Q2 2020 is set to be much more pronounced. The consequences of the current crisis have not been yet fully identified and given the risk of financial fragmentation, the action of the ECB should remain flexible.

Louis BOISSET

TRANSCRIPT // The drop in Eurozone GDP: the worst is yet to come : May 2020

Eurozone GDP shrank by -3.8% in the Q1 2020, in a quarterly basis, a bigger drop than in Q1 2009 during the Great financial crisis.

The extent of the economic impact will differ according to the sanitary measures put in place. At first sight, the negative economic impact on the French economy has been so far particularly massive whereas Germany looks to be less affected. Nevertheless, one needs to be careful because, beyond methodological issues, the Q1 GDP growth figure is a preliminary estimate carrying out by national statistical institutes. Given the very difficult context, first estimates could be revised in a non-negligible scale over the coming months.

The economic contraction in Q2 2020 in the euro area is set to be much more pronounced since the lockdown measures were in full force by April. The conditions in the labour market have experienced a fast and profound deterioration reflected in the decline in hours worked. The business and consumer confidence also dropped to low levels, sending a very negative signals from the demand side in the coming months.  

For the whole year 2020, the impact of the Covid-19 crisis will be massive but is still uncertain. According to European central bank’s estimates, the contraction in the euro area real GDP could reach 5% to 12%, depending on the scenario. In the worst case, the real GDP could be lower than its pre-crisis level for a pretty long time.

The economic recovery will depend upon many factors and notably the fiscal and monetary responses. From the monetary side, the ECB keeps playing an important role. The Governing Council announced news monetary measures during last week meeting. The conditions of the targeted longer-term refinancing operations (TLTRO III) has been further eased. To complement those measures, the ECB decided as well to launch a new series of pandemic emergency longer terms refinancing operations. The ECB’s chief economist, Philip Lane recently stresses that those measures would ensure favourable conditions in all segments of the euro area financial system. The consequences of the current crisis have not been fully detected and given the risk of financial fragmentation, the action of the ECB would remain flexible.

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