Euro-area economic catacylsm eases up on less stringent lockdown

Workers wear face masks while working on the car assembly line on the first day of the resumption of automobile production at the Volkswagen factory during the coronavirus crisis on April 27, 2020 in Wolfsburg, Germany. (Photo by Alexander Koerner/Getty Images)
Workers wear face masks while working on the car assembly line on the first day of the resumption of automobile production at the Volkswagen factory during the coronavirus crisis on April 27, 2020 in Wolfsburg, Germany. (Photo by Alexander Koerner/Getty Images)

The euro-area economy started to claw its way out of its deepest downturn ever as the relaxing of coronavirus lockdowns allows thousands of businesses to reopen.

The big question is how long it stumbles along at the bottom before a meaningful recovery starts to take shape. While a report from IHS Markit on Thursday offered some hope, it also suggested that improvement will be slow.

Inflows of new business are still plummeting, and a key risk is that weak demand becomes self-reinforcing if it forces companies to shed more workers.

Markit’s headline gauge of private-sector activity rose in May, though it continued to signal contraction in both manufacturing and services. Companies’ orders remained under pressure and jobs were cut at an unprecedented rate.

"Demand is likely to remain extremely weak for a prolonged period, putting further pressure on companies to make more aggressive job cuts as government retention schemes expire," said Chris Williamson, chief business economist at IHS Markit.

Growth could slump by almost 9% in 2020, and a full recovery could “take several years,” he said.

Bloomberg Economics sees the euro-area shrinking about 14% this quarter after a 3.8% contraction in the first three months of the year. While some European Central Bank officials have said the economy may have hit the low point, the outlook is still hugely uncertain.

The ECB has multiple scenarios, the most optimistic of which sees a return to pre-virus levels next year and the gloomiest forecasting that won’t happen before the end of 2022. Against such a backdrop, economists see the central bank adding to its stimulus program again by expanding its bond-buying program.

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