Europe Recession Inevitable as Last Line of Defense Crumbles
The pandemic is dealing a crushing blow to the euro-area services industry, which makes up three quarters of its economy.
(Bloomberg) -- There’s 1,000 miles and a body of water between Mark McGowan and the Italian epicenter of Europe’s coronavirus outbreak. He may as well be next door.
His 16-room hotel, the Scholars Townhouse in Drogheda, north of Dublin, has seen a 60% drop in room revenue. The business market “just melted away overnight,” he said.
“We have three people at reception and what struck me is the silence. You don’t hear the keyboards being hit anymore” the 37-year-old said. “It’s not looking good for the summer.”
The pandemic is dealing a crushing blow to the euro-area services industry, which makes up three quarters of its economy and whose resilience was crucial to offset a manufacturing slump last year. With the outbreak forcing airlines to cancel flights, governments to suspend schools and impose nationwide lockdowns, the first recession since 2013 appears all but inevitable.
While Italy is the worst hit by the virus with 25,000 cases, the pain is fast spreading across the region’s biggest economies. France has closed non-essential businesses and Spain has declared a national emergency. Germany has yet to impose a national lockdown, but it may only be a matter of time. The government said Monday it no longer expects the economy to recover in the first quarter as the virus hits services as well as demand for exports.
In addition to schools, bars and restaurants being shuttered, entire sporting tournaments have also been suspended. Ireland’s government called off public events for St. Patrick’s Day, the country’s national holiday on March 17, an event worth millions of euros to the economy.
Economists have slashed their forecasts for the euro area and many see a recession as the most likely outcome in the first half of the year, even as governments pledge to spend billions to support companies and households.
A recovery hinges on the efforts to contain the outbreak being successful, but it’s unclear how quickly the lockdowns will slow the spread of the virus. The European Commission says the economy could shrink by 1% this year.
Eduardo Estevez Gudino, director of the Family Business Association in Castilla and Leon, a Spanish region, said the decision to cancel the group’s annual meeting is one example of the ripple effects of the coronavirus. The association’s 150 members had to cancel hotel reservations and contracts with production companies that were putting together the event.
“The economic consequences of the coronavirus are disastrous,” Estevez Gudino said.
The dire situation has turned the world upside down in a matter of weeks. Central banks have been forced back into monetary easing and the European Union may suspend fiscal rules to allow for stimulus. Even Germany, averse to deficits, pledged to spend whatever is needed to combat the economic impact.
EU finance ministers meet in Brussels on Monday to decide on their response to prevent a short-term hit from becoming a crippling, long-term slump. The key is to help companies cover costs and get through a squeeze on cashflow until the situation improves.
“We want to ensure that we are able to preserve our companies, able to preserve jobs as much as possible so we avoid more lasting damage to the economy,” Commission Vice President Valdis Dombrovskis told Bloomberg Friday.
What Bloomberg’s Economists Say...
“Since neither monetary nor fiscal policy can conjure up output when people are prevented from working or shopping, the focus should be on making sure the impact does not linger after the virus abates.”
--Jamie Rush. Read more here
Economic data isn’t yet capturing the full magnitude of the fallout, but signs are creeping into reports. In the monthly Purchasing Managers’ Index for February, services firms said foreign demand for business fell the most in five months. The next release, due in less than two weeks, will probably tell an even gloomier tale.
At the start of this year, economists had expected relative stability in the services sector to help maintain the euro zone’s modest expansion. They thought that it would continue to be a counterweight as manufacturing slowly pulled itself back to its feet.
As governments announce more and more dramatic measures to halt the spread of the virus, executives at companies around the region say they hope that the actions, though painful, will prove successful.
Margarida Almeida, chief executive officer of Portugal’s Amazing Evolution Management, said she’s trying to remain optimistic even after some group cancellations at the 20 hotels it runs.
“I think it’s a temporary situation,” she said. “I want to believe that.”
--With assistance from Joao Lima, Sotiris Nikas, Harumi Ichikura, Henrique Almeida, Zoe Schneeweiss and Iain Rogers.
To contact the reporters on this story: Jeannette Neumann in Madrid at jneumann25@bloomberg.net;Dara Doyle in Dublin at ddoyle1@bloomberg.net
To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Alaa Shahine
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