By Paul Hannon and Eric Sylvers 

The eurozone economy grew at a record pace in the third quarter, but has already stalled in the face of a resurgence of coronavirus infections and tough new restrictions, leaving Europe lagging even further behind the U.S. and Asia in its recovery from the crisis.

Figures released by the European Union's statistics agency Friday showed the combined gross domestic product of the eurozone's 19 members was 12.7% higher in the three months through September than in the previous quarter, having declined 11.8% in the three months through June.

Growth during the third quarter was stronger than in the U.S. That largely reflected the fact that the second-quarter lockdown was more stringent and longer-lasting in Europe, leading to an especially large rebound after the restrictions were lifted.

However, that rebound has already been stalling this fall, as infections have risen again and consumers avoided eating out, traveling and in-person entertainment, while businesses have become more cautious. Policy makers throughout Europe have steadily reined in social and economic activities.

After Germany and France, Europe's two biggest economies, imposed new restrictions this week to contain the virus, the eurozone is now expected to shrink again this quarter.

"Expect the dreaded double-dip," said Bert Colijn, an economist at ING Bank.

Some economists now expect the German economy -- which has withstood the pandemic better than its neighbors because of its close trading ties with a resurgent China -- to contract in the fourth quarter.

France, though, may be hit hardest by the second wave. Economists at Berenberg Bank estimate the French economy could shrink between 3% and 4% this quarter, thought that would be a much smaller contraction than the 13.8% recorded in the three months through June.

The French restrictions -- which closed nonessential shops and required people to mostly remain at home -- hit businesses that had only begun to come up for air.

Hortense Harang, who runs a company that connects local French flower producers with florists and retail clients, had been planning to expand into new business areas such as catering. The recent surge in infections put an end to those plans for now.

"All summer people were behaving like Covid didn't exist anymore and we've now seen what the result is," said Ms. Harang.

Any contraction in the eurozone economy is unlikely to be as deep as the April drop, which was the steepest since World War II, because manufacturing has largely been spared.

However, it would likely leave Europe as one of the weakest parts of the global economy as the year winds down, with China having already returned to pre-pandemic levels of output, the U.S. 3.5% below that threshold, and the eurozone trailing slightly at 3.7%. Whether Europe remains a weak link depends on the length of the restrictions and how disheartened businesses and households become.

Barclays Research estimates the U.S. economy will likely return to its pre-pandemic size in the final months of next year, but Europe's large economies will have to wait until 2023.

"It may be too early to call Europe the main loser of this Covid crisis, but for now it does look as if the fourth quarter will be worse for Europe," said Christian Keller, chief economist at Barclays.

A double-dip contraction raises the risk of longer-term damage as businesses fail and jobless workers' skills degrade. A dearth of investment could compound Europe's longstanding problems with weak growth and a scarcity of new industries.

Europe's major airlines are already cutting capacity plans after hoping earlier in the year to be able to start flying more. Air France said Friday it will now operate just 35% of its 2019 capacity in the current quarter, down from 50% that it had planned previously. International Consolidated Airlines Group SA, the owner of British Airways and Aer Lingus, is reducing capacity to 30% from earlier plans to fly 40% of its 2019 flights.

"The recovery is going to be a long ascent with setbacks," said Kristalina Georgieva, the International Monetary Fund's managing director. "We are right now experiencing one of those setbacks in a very dramatic manner. It will hold the recovery back, but it's still a recovery."

Nevertheless, the strength of the rebound is a source of hope for some businesses.

"A slowdown in the coming months seems inevitable, but I'm cautiously optimistic because I never would have dreamed we'd have such a strong recovery after the long lockdown," said Laura Rocchitelli, chairwoman and chief executive of Rold, a company near Milan in Italy that makes parts for home appliances.

The signs of a second contraction are already evident in recent surveys. A measure of activity based on responses from purchasing managers released last week recorded a decline in October, the first since June. The new restrictions will likely ensure that activity falls again in November, although a return to growth in December is still possible.

"November will be a disaster for all of us," said Mehdi Sebti, who has a store in central Paris that sells bags and other products. "They say the lockdown is to save the Christmas season. Fingers crossed that is what happens."

The second wave could widen the already yawning north-south gaps in the scale of the pandemic's economic damage. Because Spain and Italy rely more on face-to-face services, they could suffer the most over the coming months, particularly if restrictions remain in place until the spring.

"In more than 120 years of history, there have been many crises," said Gustavo Sierra, a manager at the La Pepica restaurant in Valencia, Spain. "But we had never seen something like this before."

In its time, La Pepica has served paella to Ernest Hemingway and Orson Welles. International tourists used to account for 60% of diners, but very few tourists visit Valencia now. Reservations have fallen 90%. La Pepica can accommodate 300 guests, but they have recently averaged 50, Mr. Sierra said. The restaurant has stopped serving dinner.

But even in Southern Europe, some businesses remain optimistic -- chiefly manufacturers that rely on overseas sales for much of their revenue.

Rold generates about 85% of its 40 million euros, equivalent to $47 million, in annual sales outside of Italy, mostly in China, South Korea, other parts of Europe and the U.S. It has hired 24 people this year as it prepares to increase its product line despite the uncertainty due to the coronavirus.

"We are investing now so we aren't caught flat-footed when we come out of this Covid tunnel," said Ms. Rocchitelli.

--Maria Martinez in Valencia, Spain, contributed to this article.

Write to Paul Hannon at paul.hannon@wsj.com and Eric Sylvers at eric.sylvers@wsj.com

(END) Dow Jones Newswires

October 30, 2020 07:22 ET (11:22 GMT)