Euro-Area Economic Cataclysm Eases Up on Less Stringent Lockdown

(Bloomberg) -- The euro-area economy started to claw its way out of its deepest downturn ever as the relaxing of coronavirus lockdowns allows thousands of businesses to reopen.

The big question is how long it stumbles along at the bottom before a meaningful recovery starts to take shape. While a report from IHS Markit on Thursday offered some hope, it also suggested that improvement will be slow.

Euro-Area Economic Cataclysm Eases Up on Less Stringent Lockdown

Inflows of new business are still plummeting, and a key risk is that weak demand becomes self-reinforcing if it prompts companies to shed more workers. While some European Central Bank officials have said the economy may have hit the low point, the outlook is still hugely uncertain and depends crucially on how long containment measures last.

Germany and France are asking the European Commission to issue 500 billion euros ($550 billion) of European Union debt to finance a recovery fund that will be distributed according to need. Bloomberg Economics sees the euro-area shrinking about 14% this quarter after a 3.8% contraction in the first three months of the year.

“Demand is likely to remain extremely weak for a prolonged period, putting further pressure on companies to make more aggressive job cuts as government retention schemes expire,” said Chris Williamson, chief business economist at IHS Markit.

Growth could slump by almost 9% in 2020, and a full recovery could “take several years,” he said.

What Our Economists Say:

“We by no means expected a rapid bounce back in activity, but a further big decline compared to April seems implausible.”

-- Jamie Rush. For the full REACT, click here

Markit’s headline gauge of private-sector activity rose in May, though it continued to signal contraction in both manufacturing and services. Companies’ orders remained under pressure and jobs were cut at an unprecedented rate.

The ECB has multiple scenarios, the most optimistic of which sees a return to pre-virus levels next year and the gloomiest forecasting that won’t happen before the end of 2022. Against such a backdrop, economists see the central bank adding to its bond-buying program -- the main stimulus tool -- as early as June.

The Markit indexes for individual countries showed Germany contracting at a slower pace than France. High frequency data for the countries back up that picture, with demand for electricity holding up and job postings falling less than in other countries. The PMI figures show manufacturers are also faring better than services providers.

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