EUROPE


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Eurozone’s Contraction Could Reach Double Digits
The Eurozone’s economy contracted 3.8 percent in this year’s first quarter compared to the last three months of 2019.
That figure translates to an annual contraction rate of 14.4 percent if the pace of economic retreat is maintained throughout this year. In Spain, the annualized contraction was 19.2 percent; Italy saw a 17.6-percent reduction. In France, the contraction was 21 percent, the worst since records began being kept in 1949.
“Measures to contain the spread of the coronavirus have largely halted economic activity,” noted Christine Lagarde, president of the European Central Bank (ECB). She said the speed and severity of the economic damage is unprecedented since World War II.
With economic restrictions only beginning to lift, analysts expect the fourth quarter’s damage to be even more severe. Lagarde has said the Eurozone’s second-quarter economic performance could be four times worse than the first’s.
Economists expect the Eurozone’s economy to contract by between 5 and 12 percent this year, depending on how hesitant consumers are to re-enter shops, factories, and workplaces.
On 30 April, the ECB discussed a plan to buy up to €850 billion worth of European nations’ bonds to backstop countries making risky investments to save industries and key corporations.
Some analysts have referred to the plan as paying nations’ banks to lend money.
The bank also will allow some commercial banks to borrow at a -1.0-percent interest rate if the money is reloaned to businesses and consumers.
The plan is likely to heighten already tense political divisions between northern and southern Europe. Countries in the south have fared worse and need more aid; countries in the north are growing increasingly resentful of having to bail out their less-fortunate Europartners.
Some analysts fear the strain could break apart the European Union if some nations decide to abandon the euro as a currency to escape hefty financial obligations to other countries in the union.
TREND FORECAST: As we have detailed in the Trends Journal last year, Europe was already sinking near recessionary levels with GDP up only 0.1 percent in both the euro area and EU28. Therefore, as economic conditions continue to deteriorate, Europe’s prolonged economic distress will add to weighing down the global economy and slow recovery in the U.S. and around the world.
Manufacturing Crashes at Record Rate
Europe’s factory production, new orders, export sales, and purchasing all plunged at a record pace in April, according to the IHS Markit research firm.
The availability of parts and raw materials also contracted at a never-before-seen pace.
Confidence about the future sank to a fresh series low. The IHS Markit Eurozone Manufacturing PMI registered 33.4 in April, down sharply from March’s 44.5. Below the earlier flash reading, the latest PMI was the lowest ever recorded by the series (which began in June 1997), surpassing readings seen during the depths of the global financial crisis and indicative of a considerable deterioration in operating conditions.
Some countries were less gloomy than others, but all registered below 50, the dividing point between optimism and pessimism:

  • The Netherlands, 41.3, a 131-month low
  • Ireland, 36.0, a 133-month low
  • Germany, 34.5, a 133-month low
  • Austria, 31.6, a record low
  • France, 31.5, a record low
  • Italy, 31.1, a record low
  • Spain, 30.8, a 136-month low
  • Greece, 29.5, a record low

Mandated national lockdowns hid underlying weaknesses.
April was the twentieth consecutive month in which backlogs of work shrank and the twelfth in a row that manufacturers reduced their workforces. Layoffs were greatest in Greece, Ireland, and Spain.
Practical steps to protect workers’ health, such as social distancing on factory floors, will force factories to run at reduced capacities even if demand strengthens quickly, which is unlikely given levels of lingering unemployment.
“April will have hopefully represented the eye of the storm in terms of the virus impact on the economy,” said Chris Williamson, IHS’s chief economist. “However, the PMI is indicating… any recovery will be frustratingly slow.”
German Auto Makers’ Outlook Craters
German automakers’ assessment of their business climate crashed between March and April.
The ifo Institute’s Business Climate Survey for April in the sector crashed from -13.2 in March to -85.4 now.
The plunge records both the largest month-on-month drop and the lowest rating since figures began being kept 30 years ago.
The survey measures executives’ expectations of future business performance.
Orders fell, piled-up inventory increased, and use of production capacities stood at 45 percent, also the lowest in 30 years.
In the survey, the index for production expectations dipped from -36.2 last month to -44.2 now; export expectations fell from -43.9 to -64.9; and expectations for business overall slid from -34.6 to -45.7.
Central Bank Under New Pressure as Italy’s Credit Rating Sinks
On 28 April, credit rating service Fitch downgraded Italy’s bonds to one step above junk status, noting that the new debt the country has taken on to fight the virus pandemic and to endure a stringent economic shutdown raises doubts about the stability of the government’s finances.
The downgrade was surprise; Fitch was not due to review Italy’s creditworthiness for another three months.
Moody’s already had lowered Italy’s bond rating to one step above junk. Standard & Poor’s reviewed Italy’s credit last week and held its rating at two steps above junk.
Italy is “a step closer to that cliff edge,” said Paul Brain of Newton Investment Management, but “there’s a window of three to six months where Italy is safe.”
After Fitch’s downgrade, Nomura Asset Management bought 30-year Italian bonds, expecting Italy’s predicament would spur the European Central Bank (ECB) to increase its already extravagant bond-buying program.
“There’s no turning back” for the ECB, said Nomura portfolio manager Dickie Hodges.
“Every time the market starts to lose confidence in Italy, they will have to step things up. It doesn’t really matter” if Italy’s bonds become junk “if the central bank is buying everything,” said Hodges.
The ECB’s governing board is scheduled to meet on Thursday, where many analysts expect it to expand its bond-buying program as it mulls a more comprehensive pan-European economic recovery plan.
“There will be disappointment unless there’s a strong signal they are prepared to do more,” said David Riley, chief strategist at BluBay Asset Management.
The “New ABnormal” Relaxed Lockdowns
European governments are planning to relax national economic shutdowns beginning this month but within an array of measures intended to keep the coronavirus at bay.
France will begin to ease restrictions on 11 May, but the government is retaining broad new powers to control citizens’ movements between regions within the country. It also is establishing a legion of officials who will trace infected persons’ contacts.
In Greece, small retail shops will be allowed to reopen next week and people will be permitted to enter churches one at a time to pray. Religious services and some schools will resume mid-month and bars and restaurants can reopen in June if they serve patrons only outdoors.
Spain, with one of the world’s strictest lockdown regimes, is permitting restaurants to offer takeout food this week and allowing people outdoors alone to jog or ride bikes. Next week, small shops can reopen.
In Germany and Spain, Google’s mobility-to-workplace index showed the beginnings of people returning to work but no significant improvement in the numbers related to travel for pleasure.
Since the lockdowns were imposed, travel to group sites such as events or retail stores has fallen 80 percent.
Across the continent, mobility is still at about half pre-shutdown levels. Trips to work are down 43 percent in Germany and off as much as 68 percent in France, Italy, Spain, and the U.K.
All plans to restart these economies are based on close monitoring of COVID-19 infection rates. Governments have made clear that if infection rates rise again, the lockdowns will be reimposed.
TREND FORECAST: With freedom, liberty, joy, and beauty sapped out life, the new unscientific, politically determined unlocking laws will not sharply boost economic growth.
Indeed, absent a rebirth of COVID hysteria mongering in autumn, it will take many months for consumer economic activity to reach pre-lockdown levels, which were also in decline.

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