Eurozone Enters Recession On Record Growth Plunge; July Inflation Increase Surprises

- Historic GDP declines across Europe

- Eurozone inflation strengthens unexpectedly

- Data collection difficult due to pandemic

- EUR/USD continues slide after pushing past 1.19

- Analysts see recovery underway, but slow growth likely

 

By Eric Culp

European Editor, LiveSquawk News

@EricCulpLS

 

31 July 2020

 

It’s ugly, but was expected.

 

The Eurozone economy entered recession with a record contraction in the second quarter after a number of countries in the single currency area announced historic declines in GDP during the period, one that included the height of coronavirus lockdowns in Europe.

 

The Eurozone’s quarterly growth rate plummeted to -12.1pct, according to preliminary data from the EU statistics office Eurostat. The historic decline was just slightly worse than the -12.0pct market estimate and fell well below the -3.6pct reading in the first quarter. The single-currency area reported flat growth in the final quarter of 2019.

 

EU GDP plunged 11.9pct on the quarter, which was also a record decline.

 

The euro continued lower against the greenback following the report and was more than half a cent below its peak after pushing above 1.19 early in Europe’s morning session.

 

The second-quarter growth numbers could be subject more adjustments than in the past due to the coronavirus pandemic, Eurostat said. “These preliminary GDP flash estimates are based on data sources that are incomplete and subject to further revisions under the Covid-19 containment measures.”

 

The next estimates for the second quarter of 2020 are due on 14 August 2020.

 

“There are few silver linings in the data published today, which confirm that Eurozone GDP slumped just as much as feared in the second quarter,” said Andrew Kenningham, chief Europe economist at Capital Economics.

 

“While parts of the economy have sprung back to life over the past couple of months, the damage already done combined with the current and potential future impact of the virus mean that the recovery will be painfully slow.”

 

Consumer price growth beats estimates

Eurozone inflation this month surprised to the upside. Annual consumer price growth in July rose to 0.4pct to beat the 0.2pct estimate and the 0.3pct reading in June, according to preliminary data. The annual rate of core inflation jumped to 1.2pct to beat the 0.8pct estimate, which was also last month’s increase.

 

Prices for food, alcohol, and tobacco showed the most growth, Eurostat said. 

 

However, inflation is still much weaker than the European Central Bank’s target of near but below 2pct.

 

Eurostat also warned about collection issues for the consumer price data, citing restrictions related to the pandemic.

 

 

Historic growth declines for Eurozone Big Four

Germany started the record-breaking announcements on Thursday by reporting that Europe’s largest economy contracted by 10.1pct in the second quarter. The quarterly decline was the worst since the country began breaking down GDP into three-month reports in 1970. The German recession began last quarter.

 

France, the Eurozone’s second largest economy, dove deeper into recession with a record quarterly drop of 13.8pct, which was better than the expected 15.2pct decline and the 5.9pct reduction in the first quarter.

 

Italy’s recession worsened;  growth shrank a record 17.3pct, a drop in-line with estimates, after a 5.5pct contraction in the previous three months.

 

Spain entered recession when output plunged a historic 18.5pct compared to the forecast of a 16.6pct fall and the 5.2pct slide in January-March.

 

Bert Colijn, senior Eurozone economist at ING, said in a note that recent economic indicators point to improvements in the euro-area economy, but growth obstacles remain. “The hard part of this recovery is set to start about now.

 

“First of all, slightly higher trending new Covid-19 cases increase the risk of reversed reopenings, and we're already seeing local signs of that. Secondly, from this point on, cautious increases in unemployment and bankruptcies and weak investment will bring to light more characteristics of a general economic slump. These factors are likely to drag on for some time, making a swift recovery to pre-corona levels of GDP out of the question.”