European economic sentiment tumbles in early March

Economic sentiment across Europe has suffered its worst monthly fall since records began in 1985, according to data that was mostly collected earlier this month before countries enforced lockdowns to fight coronavirus. 

The European Commission’s monthly survey of business confidence across the EU tumbled 8.2 percentage points in March from 103 to 94.8, below the long-term average of 100 for the first time since January 2015.

In the eurozone, the fall was even larger, led by Italy, where lockdowns were introduced first and where the economic sentiment indicator plunged 17.6 points to 83.7, the lowest level since 2013. In Germany and France, the eurozone’s two largest economies, there were falls of 9.8 points and 4.9 points respectively with the overall sentiment indicator dragged lower by a collapse in business expectations.

The data came as Germany's “five wise men”, the panel of economic experts who advise Angela Merkel's government, said on Monday that the German economy could shrink as much as 5.4 per cent this year as a result of the coronavirus pandemic.

The experts modelled three different scenarios for the German economy this year, depending on how long the shutdown will last and how rapid the subsequent recovery in economic activity will be. But under all three scenarios “the economic recovery we've been seeing will end abruptly, and a recession in the first half of 2020 in Germany will be unavoidable”, the experts said in their report.

The EU’s economically dominant services sector experienced the largest monthly drop in business expectations for the coming quarter since records began in 1996, with a 23 percentage point fall. Germany recorded a 30 percentage point monthly drop and Italy a 44 percentage point fall.

Despite the steep decline in the figures, the commission warned that they did not yet show the full impact of coronavirus because the majority of the data were collected in late February and early March. Fieldwork to collect the data “effectively stalled” in each country when lockdowns were introduced, the commission said. Jack Allen-Reynolds, senior Europe economist at Capital Economics, said the figures suggested stagnant economies across the EU, but he noted that the record decline still “understates the drop in economic activity and worse is likely to come in April”.

The survey looks at a number of aspects of the economy. Employment expectations across the EU were hit hardest, with a fall from 4.5 per cent above the long-term average in February to 5.2 per cent below it in March. The commission said the largest drops in employment expectations came from the services and retail sectors, adding that “consumers’ unemployment expectations surged”.

The data still include the UK, despite its departure from the EU. UK economic sentiment dropped sharply in the first half of March before measures of social distancing were introduced.

The sentiment indicator fell from an already low 95.5 in February to 92 in March, reversing some of the gains seen after UK prime minister Boris Johnson’s victory in December’s general election. Samuel Tombs, UK economist at Pantheon Macroeconomics, said the UK’s “small fall should not bring any comfort” because the survey’s collection dates represented the period before Britain took serious measures to fight the disease. 

Sweden, which has resisted closing schools or putting in place severe restrictions on the movement of its citizens, did not escape the large drops in business sentiment. Its indicator fell 5.5 percentage points to 93.5; service sector sentiment was particularly badly hit. Coronavirus business update How is coronavirus taking its toll on markets, business, and our everyday lives and workplaces? Stay briefed with our coronavirus newsletter. Sign up here Germany’s economic advisory council said in a statement that the government could help ensure a swift economic recovery by preserving industrial capacity and helping companies avoid insolvency: stabilising incomes through direct grants to households and the self-employed; and providing incentives for training and further education and making progress on digitising public administration.

Lars Feld, head of the panel, praised the government's anti-crisis measures, which include an expansion of the short-time work programme, bridging loans, tax holidays and a bailout fund that envisages temporary state takeovers of stricken companies, as “very welcome”. But he said that despite these moves “it will be hard for many small companies to hold out the longer this shutdown continues".

In the panel's baseline scenario, gross domestic product will decline 2.8 per cent in 2020 and expand 3.7 per cent next year. In the “risk scenario”, which envisages large-scale production stoppages and a longer shutdown, GDP will shrink 5.4 per cent and grow next year by 4.9 per cent. The third scenario sees the health-related lockdown lasting over the summer and the recovery starting only in 2021. In that case, GDP will decline 4.5 per cent in 2020 and grow only 1.0 per cent in 2021. Separate data published on Monday showed that German inflation sank in March as oil prices fell sharply and economic activity slowed. Harmonised consumer price inflation in Germany fell to 1.3 per cent in March, down from 1.7 per cent the previous month, according to official national statistics.

Source:  https://www.ft.com/content/fa5b5e1b-1a9e-4e01-aa03-4622e754de5e

 

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