Eurozone GDP dips as pandemic restrictions return

Real GDP for the eurozone aggregate fell by 0.7% in the fourth quarter of 2020, largely due to the re-introduction of restrictions. Many member states were forced to close non-essential services, including retail, as the number of confirmed cases of the Covid-19 virus was surging once again.

The latest estimate beat consensus forecasts of a 1% contraction, but it leaves the level of GDP 5.1% below its pre-pandemic peak. For 2020 as a whole, GDP growth was -6.8% – the worst annual result since records began for the monetary union.

Within member states, there was a varied impact largely depending on the degree of restrictions imposed. Where restrictions were minimal such as Spain, the economy managed to avoid a contraction, growing by 0.4%. There was a similar story in Germany (+0.1%), Belgium (+0.2%) and Portugal (+0.4%), all eking out some growth.

In contrast, those forced to close retail outlets saw the most negative impact. France contracted by 1.3%, while Italy saw activity fall by 2%. Austria was the worst performer, as GDP contracted by 4.3%.

As these are preliminary estimates, the contributions to GDP are not yet available, but it is likely that household consumption was the key area of weakness, as we saw at the start of last year. Reduced confidence, uncertainty over work prospects and limited opportunities to spend will have hit retail trade.

Yet, as anticipated, restrictions at the end of 2020 were less severe than in the spring, leading to a less negative impact for the economy. Despite this, many economies have extended and even tightened restrictions into the new year, meaning that there is a chance of another negative quarter of GDP growth, and therefore a technical double-dip recession.

Slow vaccine roll-out risks return of restrictions next winter

Looking further ahead, hope returned in the form of vaccines, yet concerns remain over the sluggish progress made in vaccinating the population, and the apparent reluctance and scepticism towards the vaccines.

There is already a risk that most of Europe will not have sufficiently vaccinated its population in time for summer holidays, which will badly hit the tourism industry for southern member states.

There is also a growing danger that if herd immunity is not achieved in time, then restrictions could return in winter 2021/22. This would not only risk yet another recession, but also threaten the efficacy of Europe’s fiscal stimulus plans, and potentially once again call into question the sustainability of some countries’ public finances.

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.