The head of the European Central Bank has warned that the eurozone could be on course for a 15% collapse in output in the second quarter as evidence of the economic toll caused by Covid-19 pandemic started to emerge, with France and Italy falling into recession.
After news that the 19-nation monetary union area had contracted a record 3.8% in the first three months of 2020, Christine Lagarde said much worse was possible in the April to June period, when the impact of lockdown restrictions would be most severe.
“The eurozone economy has contracted at a magnitude and speed unprecedented in peacetime,” said the ECB president, as she announced modest new measures to encourage bank lending and keep financial markets functioning.
In its first meeting since before large parts of Europe were shut down in response to the spread of Covid-19, the ECB decided not to cut its main interest rate or to increase the size and scope of its quantitative easing programme.
The central bank’s forecasts suggest that the eurozone could contract by between 5% and 12% in 2020 as a whole, but policymakers kept most of its ammunition in reserve. Lagarde urged eurozone politicians to cooperate on an ambitious package of spending measures to support economic recovery.
The ECB president spoke hours after the EU’s statistical agency Eurostat reported the sharpest decline in eurozone activity since monetary union was launched more than two decades ago.
France and Italy, the second and third biggest economies in the monetary union area, fell into recession as the EU’s statistical agency Eurostat reported a bigger fall in gross domestic product in the quarter ending in March than the financial markets had been expecting.
Of the individual eurozone countries publishing data, France said that after a decline of 0.1% in the final three months of 2019, its economy had contracted by 5.8% in the first quarter of 2020, the steepest decline since modern records began in the late 1940s.
Italy also had its second successive quarter of economic decline, contracting by 4.7% following a 0.3% decline in late 2019. The impact of Covid-19 on an already weak economy was enough to wipe out all the gains in GDP since the global financial crisis of 2008.
Spain, one of the countries most seriously affected by Covid-19, reported a quarterly drop of 5.2%, while Belgian and Austrian GDPs fell by 3.9% and 2.5%, respectively.
Germany did not release its growth figures but the effects of the pandemic on the eurozone’s biggest economy were underlined by a 373,000 increase in unemployment and a jump to 10.1 million workers on reduced hours in April.
The eurozone was barely growing before the Covid-19 shock, registering expansion of 0.1% in the final three months of 2019.
A recession is technically defined as two successive quarters of falling output, and analysts said it was now certain that the eurozone as a whole would suffer its biggest slump since its creation at the end of the 1990s.
The eurozone’s contraction in the first quarter was far more pronounced than that recorded by the US. On Wednesday the US commerce department said the GDP of the world’s biggest economy had fallen by an annualised 4.8% between January and March, equivalent to a quarterly decline of just over 1%.
Andrew Kenningham, a European economist at the consultancy Capital Economics, said the size of the hit to eurozone GDP should embolden the ECB to step up its support for growth.
“The blizzard of depressing economic data released on Thursday morning confirms that the eurozone economy was in freefall at the end of March, with GDP dropping by a record amount throughout the region,” he said.
Bert Colijn, a eurozone economist for ING bank, said: “France and Spain have been among the most strict in terms of lockdowns and hence their economies have suffered more. This would suggest that a country like Germany has experienced a smaller than average contraction.”
