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‘Historic’: Markets Marvel At Scope Of Europe’s Record Collapse On GDP Day

"...a recession like the one we’re currently in is unprecedented."

“Uniformly awful”.

That is the consensus assessment when it comes to GDP data out of Europe, where the economy shrank the most on record in Q1 amid strict lockdown protocols aimed at stopping the spread of COVID-19.

For the eurozone, output shrank 3.8%, the largest contraction since the inception of the single currency.

That was actually in line with consensus and it goes without saying that the second quarter is going to be extremely dicey too, given that the lockdowns weren’t put in place until late in Q1.

“Historic”, ING marvels, in their traditional quick take. “Almost all of the damage happened in the final two weeks of the quarter, showing how remarkably deep a contraction can become under mandated lockdowns”, the bank goes on to say, noting that “this time it really is different – a recession like the one we’re currently in is unprecedented”.

Indeed it is. In Spain, the economy shrank 5.2%. That is nearly a full percentage point worse than estimates, and the biggest decline since at least 1970.

That only captures around two weeks of virus containment efforts. INE (the country’s statistics body) said revisions will almost surely be “of a greater magnitude than usual” given the inherent challenges in measuring economic activity in an economy where such activity is as severely hampered as it is currently.

In Q2, the decline will likely be in the double-digits. The Bank of Spain is bracing for up to a 12% contraction in 2020. Spain’s epidemic is the second-worst globally, after only the US.

In France, the decline was 5.8%, a horrible miss to consensus (4%). The underlying breakdown is terrible. Gross fixed capital formation, for example, shrank nearly 12%.

Meanwhile, in Germany, jobless claims for April jumped to 373,000. If you’re wondering whether that is a large number when it comes to this particular series, the answer is most assuredly yes. It’s a record – and by a wide, wide margin.

All eyes will turn to Christine Lagarde and the ECB, which may or may not decide ot increase purchases under the pandemic QE program. The central bank has pledged to buy more than €1 trillion in assets in 2020, but it won’t be enough.

Italy was downgraded this week to one level above junk by Fitch, but thanks to the ECB’s decision to grandfather fallen angels, the country doesn’t have to worry too much about the ratings situation – or at least not as it relates to eligibility for the central bank’s facilities.

Ultimately, Europe needs a coordinated fiscal response of sufficient size and scope to shore up member countries’ economies once and for all. The problem: It’s not clear what “sufficient size and scope” would mean in these circumstances, and even if there was a way, there really isn’t the political will.


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