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Euro Area’s Record Slump Adds Urgency to Fiscal Aid Calls

Bloomberg logoBloomberg 4/30/2020 William Horobin and Jeannette Neumann

(Bloomberg) -- The euro-area economy plunged into a record contraction, an outcome that will only add more urgency to controversial demands for joint government fiscal support.

Output in the 19-country region shrank 3.8%, reflecting shutdowns to contain the coronavirus that have pushed businesses close to collapse, sent unemployment surging and forced governments to unleash billions of euros in emergency stimulus.

a close up of a map: Virus Slump © Bloomberg Virus Slump

Italy, saddled with one of the world’s highest debt burdens, saw GDP fall 4.7% in the quarter. France and Spain, also with limited room to spend their way out of the pandemic crisis, reported contractions of more than 5%.

As the health crisis has morphed into an economic catastrophe, those countries have called for a solution that would see the burden of fiscal support shared through joint European Union debt sales. Governments such as Germany and the Netherlands have rejected that over fears they’ll end up with much of the bill.

a screenshot of a cell phone: The euro-area economy just had its worst contraction ever © Bloomberg The euro-area economy just had its worst contraction ever

On Thursday, the European Central Bank acted again, announcing a new series of long-term loans for banks and cutting the rate on its existing program. Bond purchase targets remained unchanged, sending Italian bond yields higher.

Separate figures showed inflation in the euro zone slowed to just 0.4% in April, the weakest since 2016. That was largely driven by the collapse in oil prices, with energy costs plunging almost 10%.

What Bloomberg’s Economists Say...

“So as long as businesses can weather the storm, we are optimistic that the economy will rebound in 3Q, albeit to whatever the new normal turns out to bewith some social distancing measures likely to remain in place for the foreseeable future. Even in that scenario 2020 growth could come in at around -8%. The risk is that scarring to the economy or a renewed outbreak prompt a more protracted slump, with much bigger fiscal and societal consequences.”

-- Jamie Rush, David Powell and Maeva Cousin. Read the full EURO-AREA REACT.

While national responses from governments -- from loans to bailouts -- have been huge, the lack of a coordinated spending creates a risk of an uneven recovery, widening existing economic divisions in the bloc.

Investors have put Italy in focus because of its already strained finances, and Fitch surprisingly downgraded its credit rating to one level above junk this week.

Economic worries have mounted amid daily reports of dire economic numbers, as well as stories of companies near collapse and workers fearing for their livelihoods. Germany on Thursday reported a record 373,000 surge in jobless claims in April.

a screenshot of a cell phone: Jobless claims rose by a record 373,000 in April © Bloomberg Jobless claims rose by a record 373,000 in April

With the airline industry particularly hit, Airbus SE Chief Executive Officer Guillaume Faury has warned of the “gravest crisis the aerospace industry has ever known.” Germany’s Deutsche Lufthansa AG is seeking government aid, and British Airways Plc this week said it would cut as many as 12,000 jobs.

The latest GDP figures highlight the dramatic effect of the government-ordered shutdowns as just two weeks of closures and restrictions were sufficient to snuff out growth for the entire quarter. Worse is likely to come in the second quarter, as restrictions have been extended into May.

Globally, the virus outbreak has pushed economies into a tumult that was unthinkable at the start of the year. China’s output shrank for the first time in decades in the first quarter and the U.S. saw its record expansion come to an end. The IMF expects the global economy to contract 3% this year, with the euro area dropping 7.5%.

European governments are starting to ease restrictions in an effort to get their economies back to normal. There have been signs of a pickup in activity as some factories reopen. Electricity use in the European Union rose for the first time in eight weeks.

Even as confinement eases, lasting economic damage is likely with many small companies going out of businesses, and consumers worried about both job prospects and health less likely to spend.

(Updates with ECB in fifth paragraph)

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©2020 Bloomberg L.P.

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