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  • Europe

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

The currency union faces four possible growth scenarios

  • Tomasz Wieladek, T.Rowe Price International Economist
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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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For professional clients only. Not for further distribution.

This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, and prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.

It is not intended for distribution to retail investors in any jurisdiction.

This material is issued and approved by T. Rowe Price International Ltd, 60 Queen Victoria Street, London, EC4N 4TZ which is authorised and regulated by the UK Financial Conduct Authority. For Professional Clients only.

© 2020 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc.

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