Major European Economies Face Serious Issues As COVID-19 Pandemic Surges

Central banks and other analysts across Europe warned that the resurgence of the COVID-19 pandemic will have dramatically negative consequences for their economies.

With more than 6.3 million COVID-19 cases reported in Europe, the continent is now confronting a second wave of infections.

Germany, Europe’s largest economy, has not been hit as hard by the pandemic as its neighbors, but recently announced restrictions and business closures in Berlin and Frankfurt raise economic concerns. The country reported about 5,200 new COVID-19 cases on Monday and Tuesday, according to public health agency Robert Koch Institute, raising the national figure to more than 306,000.

Economic data has recently come in mixed.

On Tuesday, Germany reported a 4.5% monthly increase in industrial orders for August, but on Wednesday industrial output data for August showed a dip of 0.2% from July.

Carsten Brzeski, global head of macro at ING, said: “While yesterday’s industrial orders data gave hope that the manufacturing rebound could last into the final quarter, new restrictions on the back of an increasing number of new infections don’t bode well for the service sector. The fact that fewer activities can be organized outside should also leave its mark on consumption and services. Winter is coming.”

In June, Germany’s central bank, the Bundesbank, said it expected the overall economy to shrink by 7% this year.

France, the euro zone’s second largest economy, has almost 680,000 confirmed cases of COVID-19, second only to Spain in the number of infections.

The French national statistics agency INSEE expects the economy to contract by 9% this year – but warned that harsher lockdown measures, including the closing of bars and entertainment venues – could lead to greater economic declines.

“After the sharp rebound associated with the lifting of lockdown ... economic activity could thus slow down at the end of the year [due to] the resurgence of the epidemic,” INSEE said. “This forecast for the fall reflects the great uncertainty that characterizes the coming months. A lasting tightening of health restrictions could thus trigger a further contraction of [gross domestic product] in the fourth quarter. Conversely, if the health situation stabilizes, the evolution of GDP could be positive at the end of the year.”

The French government expects the economy to shrink by 11% this year.

Pablo Hernandez de Cos, governor of Spain’s central bank, warned on Tuesday that the imposition of stricter lockdown measures in the country could lead to dire results.

Spain, which has recorded more than 800,000 cases of the virus and more than 32,000 deaths, could see its GDP shrink by up to 12.6% this year, the worst performance on record.

“We cannot rule out more unfavorable developments,” De Cos said.

In Italy, which has suffered 36,000 deaths from COVID-19 and about 330,000 cases, the government said it expects the economy to decline by 9% this year, but rebound by 6% in 2021 while running a large budget deficit of 10.8% of GDP this year. Next year’s growth, the government said, will be fueled by a 200 billion euros ($235 billion) aid package from the EU.

But Bank Intesa Sanpaolo warned in a note that it doubted such "optimistic" figures.