Euro-Area Economy Shrank Less Than Forecast at End of 2020
Pedestrians wearing protective face masks carry shopping bags at an outdoor market in Rome. (Photographer: Alessia Pierdomenico/Bloomberg)

Euro-Area Economy Shrank Less Than Forecast at End of 2020

The euro-area economy shrank less than expected at the end of last year, though it remains on the verge of a double-dip recession amid a slow rollout of coronavirus vaccines.

Gross domestic product declined 0.7% in the fourth quarter, compared with estimates for a 0.9% drop. Germany and Spain both posted surprise economic expansions in reports last week. Italy reported a contraction of 2% earlier on Tuesday.

Euro-area output fell 6.8% in 2020 as a whole.

Euro-Area Economy Shrank Less Than Forecast at End of 2020

The economy is managing to avoid a slump on the scale of that recorded at the start of the pandemic as businesses -- notably manufacturers --find ways to cope with restrictions. Still, the near-term outlook remains challenging with a chaotic start to vaccinations that mean curbs will remain in place for longer.

In Germany, Health Minister Jens Spahn has warned of “tough weeks of shortage in this first quarter and into April.” While the country’s infection rate has been declining, it is still nearly double the level that the government has said would allow it to ease curbs.

What Bloomberg Economics Says...

“We still anticipate that 1Q will see another contraction in output, although it’s likely to be smaller than the 4% drop we forecast in early January.”

-Jamie Rush, David Powell and Maeva Cousin. To read their full report, click here.

In Italy, efforts to support the economy are being complicated by the collapse of the government. Prime Minister Giuseppe Conte resigned last month after the defection of a junior coalition member, and it’s still unclear whether he has enough support to return following a reshuffle of ministers, or whether he will be replaced. There is also a slim possibility of new elections.

Business confidence has already taken a hit. Sentiment in euro-area retail trade and services -- the sectors most affected by lockdowns -- slipped at the start of the year. The International Monetary Fund has warned that the region is set to recover more slowly from the crisis than other economies around the world.

European Central Bank officials including President Christine Lagarde have promised to bolster support if needed. For now though, they argue, a 1.85 trillion-euro ($2.23 trillion) bond-buying plan, generous long-term loans to banks and record low interest rates are sufficient to ensure financing conditions remain favorable.

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