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
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.
German sports retailer Puma SE this week reported a
better-than-expected third quarter. "Retail stores reopened, sports
events resumed, consumer confidence improved and our sales
increased week by week," said Chief Executive Bjørn Gulden. But the
company expects consumer sentiment to turn negative again as
infections rise and restrictions increase. Puma said it couldn't
provide a reliable outlook for the full year.
"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."
However, the restrictions and the economic damage they cause
could stretch into 2021. The Organization for Economic Cooperation
and Development forecast in September that the eurozone's economy
would grow 5.1% next year, but that assumed restrictions would
remain relatively light.
"It is pretty clear we are now in a worse situation, " said
Laurence Boone, the OECD's chief economist. "This will have an
impact on economic activity, on confidence, and will weigh on the
fourth quarter economic outcomes, and in turn on 2021."
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 11:46 ET (15:46 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.