Europe Stares Vacantly At Double-Dip Recession

In news that, unfortunately, market participants hooked on get-rich-quick schemes won’t care too much about, the European economy officially contracted in the fourth quarter.

That was expected and, as it turned out, the contraction was shallower than feared.

The eurozone economy shrank 0.7% QoQ, Eurostat said Tuesday. The market was looking for -0.9%.

The bloc was, of course, hit hard by a second wave of the virus, and that forced the reinstitution of various containment protocols across countries.

The ECB is staying the course on stimulus, while adopting a somewhat contradictory tone on pandemic asset purchases. On one hand, the January statement said the facility’s full fire power may not be needed. On the other hand, reports recently “confirmed” what everyone already knew — namely that the ECB is targeting specific levels for periphery spreads.

It’s hard to see how ending the bank’s most flexible asset purchase program “early” would be consistent with ensuring spreads (versus Germany) “behave.” Especially when perennial problem child Italy is having another one of its regularly scheduled crises of government.

As ever, the hope is that financial conditions and the broader economy permit the dialing back of heavy-handed intervention. Needless to say, that’s not a safe assumption. Indeed, one lesson from the post-financial crisis years is that even when economies are performing reasonably well, dialing back stimulus still isn’t possible.

In any event, the figure (below) shows the country-by-country breakdown for growth in Q4. Spain and Germany posted surprise expansions.

It’s easy to write this off as “old news,” but it’s actually not. This is ongoing. Lockdowns are still in place. And this means that while there were upside surprises, the bloc is teetering on the brink of another recession.

Commenting Tuesday, ING noted that the modified nature of Q4’s lockdowns helped alleviate some of the strain.

“Restrictive measures have been adapted and have become milder compared to the first wave,” the bank wrote. “Think of countries like France and Spain, for example, where industry and construction have remained largely open over the course of the quarter [with] a very positive effect on GDP, especially because demand for goods and construction has remained strong despite lockdowns in place.”

Still, the bottom line is just that because some lockdowns have been extended, output will probably contract again.


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