Economic Snapshot for the Euro Area

July 3, 2020

Eurozone economic outlooks darkens considerably

A third estimate confirmed lockdowns devastated the economy in the first quarter, as business and household activity froze in the last two weeks of March. The economic blow will be even tougher in the second quarter, due to the prolongation of containment measures, which are nevertheless being lifted throughout the currency bloc. The unprecedented collapse in industrial production and retail sales in April and abysmal economic sentiment and PMI readings in April−May all point in the same direction. That said, June’s PMI reading provides some hope the recovery could be quicker than expected. In the political arena, political divisions remain considerable within EU leaders on the size and the composition of a Covid-19 recovery plan. Moreover, statements by EU institutions that they will go ahead with a European digital tax following the withdrawal of the U.S. from OECD negotiations risk triggering a trade spat.

The health crisis will hammer the economy this year, suppressing investment activity and consumer spending amid a significant labor market downturn. Moreover, the fiscal response to the crisis, coupled with evaporating revenues, will complicate fiscal sustainability.

The economy is seen contracting 8.3% in 2020, which is down 0.1 percentage points from last month’s forecast. In 2021, GDP is seen increasing 5.7%.