Moody's expects poor GDP numbers for the first quarter / ANALYSIS

London - Preliminary first -quarter GDP estimates for several euro zone member countries and for the currency area itself will make the coming week extremely busy. We expect the numbers to be awful. Whole swaths of the European economies were forced to shut down in March owing to the COVID -19 crisis

di Barbara Teixeira Araujo*

London - Preliminary first -quarter GDP estimates for several euro zone member countries and for the currency area itself will make the coming week extremely busy. We expect the numbers to be awful. Whole swaths of the European economies were forced to shut down in March owing to the COVID -19 crisis. We are forecasting that euro zone GDP fell by as much as 3.9% q/q in the first quarter, which would be the worst result since records began in 1995.

Across sectors, we expect the main blow was dealt to the services indus tries as lockdown measures meant that most consumer -faced services businesses were forced to shut their doors. While the timing of the enforcement of containment measures varied from country to country —Italy was the first, imposing a national lockdown on March 10 — it is fair to say that most of the area’s economies had at least some sort of lockdown in place from the third week of March. Restaurants, cafes, cinema, theaters and nonessential retail shops were closed almost everywhere, while public gatherings were forbidden. Adding to that, travel was banned (with most countries closing their external borders), and free movement was restricted. We thus expect that the industries that suffered most are transport, travel, accommodation and food services, leisure, arts and entertainment, and retail. Granted, supermarket sales likely soared as people rushed to stockpile and were forced to eat at home, and this provided some offset to retail sales. Also, online shops have enjoyed a sharp increase in purchases, based on anecdotal evidence. Even so, we don’t expect that any rise in sales in those sectors will be enough to offset the slump we see coming elsewhere. Manufacturing and construction should have performed a bit better. Most member countries didn’t enforce fact ory closures, nor did they ban building activity.

Only the Italian and the Spanish governments shut down all non- essential activities including manufacturing and construction for some time as the virus hit those two countries hard.

But even without enforced lockdowns elsewhere, many manufacturers closed their plants, as did many builders, either because demand for their products slumped, or because they were under pressure to keep their employees safe.

This means we expect that manufacturing and construction output fell sharply in the second half of March, though the numbers are set to be uneven across countries. Worse news is that the overall decline in expected first- quarter activity pales in comparison with the 12% q/q fall we are penciling in for the sec ond quarter.

Lockdown and quarantine measures were extended into April everywhere in the currency area, and in some countries they are expected to remain in place during a large part of May as well, with chances being that life won’t fully go back to normal until summer. With numbers suggesting that the virus already peaked in the euro zone, several countries have started publishing plans for easing the restrictions.

However, it is clear that the lockdown measures will the phased out only gradually, with sm all and craft shops opening first, but with restaurants and other leisure services business remaining closed for longer. It looks like public events won’t be allowed to take place during this summer at all, which will hurt the arts and entertainment sector badly. Also, travel is set to remain restricted for the foreseeable future. Businesses won’t want to risk a second wave of infection coming from abroad.

Some governments have suggested that they are unlikely to fully open their borders until a vaccine or a cure is found, and this is not expected to happen until 2021. March unemployment data should also be released next week. The numbers are expected to be bad, but they still won’t fully reflect the size of the damage that was done to euro zone’s labour mar ket by the COVID -19 crisis. We will have to wait for April or May’s figures for that.

The high-frequency unemployment claims figures have been dreadful, showing that jobless claims have soared to historically high levels across all euro zone countries over the past weeks. They are suggesting that the unemployment rate could almost double in coming months to around 15%, erasing all of the gains of the past decade. We aren’t as pessimistic, since we think the unprecedented support put in place by the euro zone governments will help put a lid on the losses. But the truth is that not everyone is eligible for the support schemes, and many firms will still go bankrupt and lay off employees. In any case, we expect that the jobless numbers won’t be very reliable in coming months, and that’s mostly because of methodological issues.

Many people who have lost or will soon lose their jobs won’t actually be counted as unemployed, as they are unlikely to start looking for another job right away given the current situation.

Also, the short- term unemployment schemes suggest that many people will be counted as employed even if they lost most of their income and are working far fewer hours.

*Moody’s Analytics

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