Eurozone falls into double-dip recession as third COVID wave hits growth

·3 min read
German chancellor Angela Merkel. Photo: Michael Kappeler/AFP via Getty Images
German chancellor Angela Merkel. Photo: Michael Kappeler/AFP via Getty Images

The eurozone has slumped into a double-dip recession as a raft of restrictions and lockdown measures put in place to curb a third wave of COVID-19 took its toll.

New figures from Eurostat revealed that output in the 19-nation euro area shrank by 0.6% during the first quarter of the year. This is its second consecutive quarter of negative growth after a 0.7% contraction in the fourth quarter of 2020.

In the wider EU, GDP fell by 0.4% in the months from January to March, after a 0.5% contraction three months prior.

The fall was driven by contractions in three of the eurozone’s largest economies - Germany shrank by an unexpected 1.7%, Spain contracted 0.5% and Italy’s GDP fell 0.4%.

The German economy, which is the largest on the continent, is still almost 5% smaller now than it was before the health crisis struck last year.

Carsten Brzeski, an economist at ING, called the drop “a severe setback”.

“While the country was a positive growth driver for the entire eurozone economy at the end of last year, it has now turned into a drag factor.”

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Italy’s slump also means that the country is now in a double-dip recession after contracting by 1.8% in the last three months of last year.

France managed to grow 0.4% as it delayed its lockdown until the end of March, despite calls for president Emmanuel Macron to act faster amid a surge in infections that threatened to overwhelm hospitals.

Eurostat also revealed that among the member states for which data are available for the first quarter 2021, Portugal recorded the highest decrease compared to the previous quarter, with a fall of 3.3%.

Lithuania and Sweden recorded the highest increases, growing 1.8% and 1.1% during the quarter, respectively.

“Put simply, the EU is dragging its feet when it comes to its economic recovery. However, speed aside, it is moving in the right direction – particularly as the vaccine roll out gathers pace,” Robert Alster, CIO at wealth manager Close Brothers Asset Management, said.

“The summer months are crucial for southern Europe’s road to recovery, with countries such as Spain, Italy and Greece heavily reliant on tourism. Hospitality businesses in particular will be banking on some sort of rebound, if not we could see a late summer of discontent aimed at Brussels.”

At the start of the year, the COVID vaccine rollout programme across Europe was sluggish, and fell far behind the UK and the US. However, it has recently gathered pace and the region expects to ramp up their vaccinations to fully cover 70% of the population by mid-July.

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The news comes as unemployment across the eurozone has also dropped over the period.

Eurostat said seasonally-adjusted unemployment rate in the euro area fell to 8.1% in March, from 8.2% in February 2021, but this was up from 7.1% in March 2020 when the pandemic started.

The youth unemployment rate was still high, with 17.1% of young people out of work in the EU and 17.2% in the euro area.

Separate figures on Friday also showed that eurozone inflation continued to rise, from 1.3% in March to 1.6% in April.

In contrast, the US yesterday posted annualised growth of 6.4%.It was the second-fastest GDP growth pace since the third quarter of 2003 and followed a rate of 4.3% in the final quarter of 2020.

Economists polled by Reuters had forecast GDP to grow at a 6.1% pace in the January-March period.

The American economy rebounded more quickly in the latest three months thanks to two additional rounds of COVID-19 relief stimulus from Washington.

Two weeks ago China also announced a 0.6% expansion.

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