Industry Voice: The Eurozone's Recovery Will Take a Break This Winter

The currency union faces four possible growth scenarios

clock • 4 min read

The path of the eurozone's economic recovery remains uncertain as a second wave of coronavirus cases is occurring in many countries. A number of scenarios for the recovery remain possible, including a damaging double‑dip recession. Which of these scenarios plays out will depend on the severity of any further outbreaks of the virus—and how governments choose to respond to them.

Further Lockdowns Would Hit the Recovery

(Fig. 1) Four scenarios for eurozone real GDP growth

(Fig. 1) Four scenarios for eurozone real GDP growth

As of September 30, 2020.

1 Percentage of recovery to pre-coronavirus pandemic level.
2 Estimate.
Source: European Commission/Haver Analytics; T. Rowe Price calculations.

Economists do not have the scientific expertise to credibly forecast virus spread and mortality, which means it is easier to come up with scenarios, but difficult to assign credible probabilities of these scenarios occurring. Our current view is that the highly-targeted (intelligent) lockdown approach could lead to 0% growth in the fourth quarter of 2020 and the first quarter of 2021, but the situation is fluid and forecasts may change. Past recessions also provide little guidance on what to expect. Historically, deep recessions have been followed by V-shaped recoveries—and the leanness of consumer balance sheets before this recession would perhaps suggest that this might occur this time. However, the main cause of the current recession—a contagious virus—cannot be addressed by economic policy alone. A second large shock in the form of more widespread government restrictions and/or major hits to economic confidence due to an outbreak of the virus is plausible.

If the virus spreads at an exponentially higher rate, the path of least resistance will be the intelligent lockdown approach. By imposing restrictions on certain activities, such as social consumption (restaurants and bars) and mixing of households, but leaving businesses open and avoiding stay-at-home orders, this approach should support some degree of virus control with the least economic hit. In Europe, Italy and Germany have applied this approach in response to renewed outbreaks. At the time of this writing, France, Spain, and the UK are also embarking on this approach.


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