Eurozone on Brink of Recession Amid Covid Wave, Slow Vaccine Rollout

Eurozone on Brink of Recession Amid Covid Wave, Slow Vaccine Rollout

High infection rates, lockdowns led to a deeper decline in services activity as 2020 began

The eurozone economy has suffered a weak start to the year, with high coronavirus infection rates and government restrictions increasing the risk of a second recession since the pandemic first struck last year.

Fresh Covid-19 outbreaks that authorities have struggled to contain are continuing to weigh on economic activity and have damped expectations for a strong global recovery in the first half, although the start of vaccination campaigns has raised hopes for a stronger rebound in the second.

In the early months of the year, a number of large economies face the threat of declining output as restaurants, cinemas and a wider range of businesses that involve close physical proximity are closed or have had their activities severely curtailed.

Data firm IHS Markit said its composite Purchasing Managers Index, which measures activity in the manufacturing and services sectors, for the eurozone fell to 47.5 in January from 49.1 in December. A reading below 50.0 points to a decline in activity.

A similar survey for Japan pointed to a bigger contraction in the services sector, while figures for the U.S. to be released later Friday are expected to point to a slowdown in the services recovery.

The eurozone PMI has pointed to a contraction in the economy for three straight months, and there seems little prospect of a significant easing in the pandemic over the remaining months of the first quarter, which will end in March.

One widely used definition of a recession is two straight quarters of declining gross domestic product. Eurozone GDP fell in both the first and second quarters of last year, and economists and policy makers fear another, albeit much smaller, drop in the fourth quarter of last year and the first quarter of this.

“A double-dip recession for the eurozone economy is looking increasingly inevitable,” said Chris Williamson, IHS Markit’s chief business economist.

The tightest lockdown since April had a particularly chilling effect on the U.K.’s economy, which saw the largest drop in its PMI of those released Friday. The measure for the services sector slumped to 38.8 from 49.4 in December, reaching its lowest level since June.

However, some parts of Europe’s economy proved more resilient, with Germany continuing to record an expansion that was partly driven by exports to China and the U.S.

Despite a difficult start to 2021, the eurozone businesses surveyed by IHS Markit said they were increasingly confident about their prospects later in the year as vaccination programs extend to an ever larger share of the population.

Speaking at a news conference Thursday, European Central Bank President Christine Lagarde added a note of caution to that optimism.

“The rollout of vaccines, which started in late December, allows for greater confidence in the resolution of the health crisis,” she told reporters. “However, it will take time until widespread immunity is achieved, and further adverse developments related to the pandemic cannot be ruled out.”

While the surveys of purchasing managers continue to point to a recession, some other indicators have shown surprising strength, most notably measures of manufacturing output.

The ECB on Friday said that 20 economists at banks and research institutes it had surveyed between Jan. 7 and 11 estimated that the eurozone economy shrank 2.5% in the final three months of 2020, and would likely stagnate in the first three months of this year. If those estimates prove correct, the eurozone would very narrowly avoid a second recession.