Health and Science

Europe should see a 'tick mark' recovery after a coronavirus plunge, economists say

Key Points
  • Euro zone GDP was lackluster in the latter part of 2019, caught in the headwinds of the U.S.-China trade war.
  • Fourth quarter GDP released by Eurostat showed the 19-member single currency area grew just 0.1% from the previous quarter. 
  • In the same quarter, the U.K., amid the throes of Brexit, saw zero growth (as did Germany).
  • Sobering growth rates recently in Europe come after modest expansions in the previous two years.
Two health care workers protected by a mask and cap attend to a patient with coronavirus at the Temporary Hospital of the Community of Madrid set up at IFEMA, on March 31, 2020 in Madrid, Spain.
Ricardo Rubio | Europa Press News | Getty Images

The sharp economic downturn caused by the coronavirus pandemic will be followed by a rebound — but it will take around two years for British and euro zone gross domestic product (GDP) to get back to recent levels, according to economists from Berenberg.

They likened the rebound to a "tick mark recovery." "The sharp downturn will be followed by a slightly flatter upturn that ultimately goes beyond the pre-coronavirus level of gross domestic product (GDP)," Berenberg's Chief and Senior Economists, Holger Schmieding and Kallum Pickering, respectively, said in a note Wednesday.

"Details will vary by country, depending on policies, the medical situation and the non-coronavirus trends in demand and supply. By and large, we expect GDP to surpass its late-2019 level roughly two years after the trough," they said.

Euro zone GDP was lackluster in the latter part of 2019, caught in the headwinds of the U.S.-China trade war. Fourth quarter GDP released by Eurostat showed the 19-member single currency area grew just 0.1% from the previous quarter. In the same quarter, the U.K., amid the throes of Brexit, saw zero growth (as did Germany).

Sobering growth rates recently in Europe come after modest expansions in the previous two years; euro zone GDP growth was 1.9% in 2018, and 2.4% in 2017. For the U.K., growth in 2018 was 1.4%, down from 1.8% in 2017. 

The coronavirus has put paid to economies around the world, however, with the IMF (International Monetary Fund) forecasting that global growth will fall below 2019's level of 2.9%, and likely further.

The outbreak, and its accompanying lockdowns on public life and business around the world, continues to wreak havoc on health-care systems, economies and humanity. To date, there are 883,225 confirmed cases of the virus around the world, according to Johns Hopkins University data.

The worst hit countries in Europe are Italy, Spain and Germany, which is seen as the growth driver of the region. Now, economists in those countries are all predicting sharp downturns in economic growth.

In Italy, Economy Minister Roberto Gualtieri said a forecast for the Italian economy to contract 6% in 2020 was probable. "Unfortunately the estimates are realistic ... at the same time we can aim for a vigorous recovery," Gualtieri told newspaper Il Fatto Quotidiano in an interview published Wednesday.

Likewise, Germany's council of economic advisors warned Tuesday that the euro zone's largest economy could shrink 5.4% in 2020. The panel said its baseline scenario — in which the economic situation would normalize over the summer — was for the economy to contract by 2.8% this year before potentially growing by 3.7% next year, Reuters reported. 

Calling the coronavirus a "severe and unusual" emergency,  Berenberg's economists said the pandemic, and the lockdowns to contain it, have affected supply and demand in the various sectors of the economy in unusual and different ways.

The likely impact ranged from sudden stops (long-distance travel) to significant losses (parts of manufacturing), to small losses (water and energy supply) and even to significant increases (health care, online shopping), they noted.

But, they added, as long as monetary, fiscal and regulatory policies remain in "whatever it takes" mode, then the risks of second-round effects such as those of a follow-up financial crisis can be contained.

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"Once the pandemic is sufficiently under control and lockdowns can be eased, economies will start to rebound," they said,

In compiling their base-case scenario, Schmieding and Pickering said they assume a severe lockdown of about eight weeks that will be eased step-by-step from late May onwards.

"Many activities that had to be switched off can then be switched on again step by step, but some activities such as long-distance travel will be restrained for much longer. The fiscal stimulus will partly offset some hesitation by consumers and companies to spend," they said.

Nonetheless, the economists noted that an event on the scale of the coronavirus pandemic and recession will almost certainly have profound economic, financial and political effects that will be felt for a long time.

"In manufacturing, companies will shorten and diversify supply chains and raise inventories. The need for fiscal repair and more social and healthcare spending can turn into a drag on gains in global supply." Still, they noted that a crisis can be the mother of invention.

"The coronavirus shock is likely to spur innovation in many fields ranging from a more efficient use of labour and communications technology to increased use of 3D printing," they said.