By Syndication The Washington Post, Bloomberg · Fergal O'Brien, Catherine Bosley
While indicators show a rebound is already underway, the 12.1% plunge in the 19-member region and mounting concerns about new flare-up in inflections point to a long recovery that may leave lasting scars in its wake.
Spain took the biggest hit, shrinking 18.5%, while French and Italian output also dropped by double digits. The declines reflect the effect of strict quarantines measures on businesses and consumer spending, and a slump in tourism in some countries.
The health crisis was most severe in the region's least economically resilient members, leaving them with little firepower to support households and businesses. That forced European Union leaders to overcome long-standing differences on joint borrowing and agree on a historic $889 billion (750 billion-euro) rescue fund this month.
National governments have already stretched their budgets to deal with the crisis, and the European Central Bank launched a 1.35 trillion-euro bond emergency program to contain the economic shock.
"I don't think anybody really realistically should think that levels of GDP by the end of 2021 will be back at the pre-crisis levels," Erik Nielsen, UniCredit Group chief economist, told Bloomberg TV's Francine Lacqua and Tom Keene. "Monetary policy will keep the pedal to the metal."
The ECB's actions have particularly targeted southern Europe after bond yields in Italy spiked early in the crisis because of investor worries that huge health spending could cripple the country's already-weak finances.
While that economy's second-quarter slump was less than in Spain or France, it's in a particularly vulnerable position because of its debt burden and sluggish long-term growth.
Overall, the rebound in Europe is under threat from a surge in new outbreaks that's emerging across the globe. Governments are reluctant to impose strict national lockdowns, but economies could suffer anyway if fear of infection alters consumer behavior or stops people going to stores, bars and restaurants.
That puts countries such as Italy, Spain and Greece -- all of which have huge tourism sectors -- under the spotlight. Spain's already bad summer season took a turn for the worse last weekend when the U.K. announced that holidaymakers returning from the country would have to quarantine because of an uptick in coronavirus cases in some regions.
The other major risk is long-term damage to the labor market. Government support programs in Europe prevented unemployment from surging as it has in the U.S., but they may only be delaying rather than preventing devastating layoffs.
With the outlook so uncertain, some expect the ECB to increase its bond-purchase program again before the end of the year to revive growth and bring inflation closer to its target of just under 2%. Data Friday showed euro-zone consumer prices grew 0.4% in July.
Euro-area unemployment is already creeping higher, as companies across the continent respond to weak demand and a dramatically changed global backdrop, particularly for travel and tourism.
Airlines have announced thousands of job cuts, while France's Airbus SE could eliminate 11% of its global payroll. Its plans to reduce head count in Spain -- where unemployment is already high -- sparked demonstrations.
High frequency data and surveys show that activity has bounced back from its trough in April and May. The sustainability of that is in question, however, particularly amid growing concern about fresh virus outbreaks.
Germany, where the economy shrank 10% in the second quarter, has already sounded the alarm over rising infection rates.
"We observed a slight recovery in sentiment and certain soft indicators. So we can say in Europe we have the first signs of recovery," ECB Governing Council member Yannis Stournaras said in a Bloomberg interview this week. "Still, the risks are on the downside."