The euro-area economy may be headed for its first recession in seven years as the coronavirus outbreak takes an increasing toll on businesses and consumer confidence.
With Italy attempting a sweeping lock-down across its richest areas and infections growing in other countries, economists at Morgan Stanley and Berenberg expect the euro-zone gross domestic product to shrink in the first half of the year. In France, the central bank now sees output barely growing in the first quarter, failing to recover from what was seen as a temporary contraction in the previous three months.
French Finance Minister Bruno Le Maire highlighted his concern, saying Europe needs a “call to arms” to defend the already-weakened economy. The outbreak has disrupted companies’ supply chains, forced airlines to cut capacity and prompted shoppers in some countries to stockpile essential food items.
The downbeat assessments come amid a meltdown in financial markets not seen since the height of the global financial crisis in 2008. It marks a grim start to the week for European Central Bank policy makers, who meet in Frankfurt and may be forced to lower interest rates and step up bond purchases. The U.S. Federal Reserve has already acted, with an unexpected easing last week.
“I want a strong, massive, coordinated response,” Le Maire said on France Inter Radio as the central bank slashed the outlook for the country’s economic expansion this quarter to 0.1% from 0.3%.
“We should work on a stimulus plan with fiscal and budgetary measures, and tax cuts, so that when the epidemic crisis is over we can relaunch the economic machine,” he said.
The virus is another blow to the euro area’s second-largest economy, after disruption from strikes caused output to shrink at the end of 2019.
“This slowdown is potentially severe but temporary,” Bank of France Governor Francois Villeroy de Galhau said in a rare statement accompanying the report.
Germany, Europe’s largest economy, said it will invest an additional 12.4 billion euros ($14.1 billion) between 2021 and 2024 and introduce changes that will make it easier for companies heavily affected by the virus like Deutsche Lufthansa AG to apply for aid to offset wages when they are forced to temporarily halt work.
One major problem with the current crisis is the potential for a shutdown of consumer demand if people stay home. Household spending gave a lift to many economies in 2019 during the savage manufacturing recession, so the loss of that support is a huge blow.