German economy’s record collapse heralds weakness in Europe | European Union

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Spain, France and Italy will likely signal even deeper economic contractions on Friday when they release their GDP.

By Bloomberg

Germany’s economy shrank the most in at least half a century in the second quarter, underscoring the scale of the challenge facing Europe after the devastation of virus restrictions hit businesses and households.

The 10.1% drop in output in the region’s biggest economy is a harbinger of worse numbers elsewhere. Spain, France and Italy are likely to register even deeper contractions on Friday, reflecting a recession that has prompted an unprecedented policy response from governments.

While indicators show a rebound is already underway, the threat of job losses as well as growing concerns about a resurgence in virus outbreaks are likely to slow the return to pre-pandemic levels.

Businesses across Europe have seen sales plunge and many are cutting jobs to streamline during a prolonged period of weaker demand in their sectors. Aviation and travel have been particularly hard hit, and Airbus SE said on Thursday it would cut production. Volkswagen AG cut its dividend after posting a loss in the first half, although the German automaker expects a gradual recovery to continue in the second half.

In Germany, consumer spending, exports and investment all fell in the second quarter. The pace of the rebound will partly depend on the effectiveness of the 130 billion euro ($153 billion) government stimulus approved in June and how quickly demand for German exports picks up. But the outlook is extremely uncertain, even after an unprecedented period European Union budget agreement defended by Germany and France.

What Bloomberg economists say…

“We estimate that social distancing rules, coupled with consumer and business caution, will cap the recovery at 3-6% compared to pre-crisis norms. Weak external demand is also likely to be a limiting factor, with many parts of the world struggling to bring the virus under control. »

-Jamie Rush. Read the full REACT

A similar picture is playing out in the eurozone, where governments have stretched their budgets on health and social care spending, and the European Central Bank has launched an emergency bond purchase program to pull the economy out of the crisis.

Job cuts remain a major risk to the outlook. Germany’s national airline Deutsche Lufthansa AG is cutting thousands of jobs and automaker Daimler AG is slashing working hours for some workers for a year.

In a separate statement, the European Commission’s confidence indicator for the eurozone outlook rose more than economists expected in July as businesses grew more optimistic about demand. Still, at 82.3, the index is more than 20 points below its February level. Unemployment in the region hit 7.8% in June, the highest since early 2019.

If rising unemployment translates into weaker demand, this could also weigh on inflationary pressures. Prices have already started to fall in Spain and are stagnating in Germany, according to separate reports on Thursday, although in the latter case this largely reflects the influence of a reduction in value added tax.

“There will be a strong rebound in the third quarter,” said ABN Amro economist Aline Schuiling. “But if I look at the monthly activity data or the high frequency data, what you can see for July is that parts of the economy continue to be disrupted and activity is still much lower. to pre-virus levels.”

(Updates with inflation in the ninth paragraph.)

-With help from Harumi Ichikura, Kristian Siedenburg, James Hirai, Catherine Bosley, Piotr Skolimowski and Adeola Eribake.

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