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Euro area plunged into deep recession as pandemic bit

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Frankfurt: The headquarters of the European Central Bank

Frankfurt: The headquarters of the European Central Bank

Frankfurt: The headquarters of the European Central Bank

The coronavirus pandemic sent the eurozone economy into the deepest recession on record in the second quarter, taking output back to levels not seen since early 2005.

While indicators show a rebound is already underway, the 12.1pc 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 18.5pc, 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 €750bn rescue fund this month.

National governments have already stretched their budgets to deal with the crisis, and the European Central Bank (ECB) launched a €1.35 trillion 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 said.

The euro was trading little changed at $1.1843 in Frankfurt. It had earlier breached $1.19 in a week long rally against the dollar.

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 Italy's second-quarter slump was smaller than that in Spain or France, it is in a particularly vulnerable position because of its debt burden and sluggish long-term growth prospects.

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 behaviour or stops people going to stores, bars and restaurants.

The other major risk is long-term damage to the labour 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.

Bloomberg

Irish Independent