LONDON – Faint hopes that Europe would recover from the economic disaster caused by the pandemic have faded as the deadly virus has started to spread rapidly again across much of the continent.
After a strong expansion in early summer, the UK economy grew much less than expected in August – just 2.1% from July, the government reported on Friday, adding to fears that further weakness is looming on the horizon.
Earlier in the week, France, Europe’s second largest economy, downgraded its forecast for the pace of expansion for the last three months of the year, from an already minimal 1% to zero. Overall, the national statistics agency predicted that the economy would contract 9% this year.
The decrease in expectations is a direct consequence of the alarm on the rebirth of the virus. France reported nearly 19,000 new cases on Wednesday – a one-day high, and almost double the previous day. The push prompted President Emmanuel Macron to announce new restrictions, including the two-month closure of cafes and bars in and around Paris.
In Spain, the central bank governor warned this week that the accelerating spread of the virus could force the government to impose restrictions that would cause an economic contraction of up to 12.6% this year.
The chief economist of the European Central Bank warned on Tuesday that the 19 countries that share the euro may not recover from the disaster until 2022, with those dependent on tourism being particularly vulnerable.
Summer is more and more like a long time ago.
In July, with infection rates falling, lockdowns lifted, and many Europeans indulging in the sacred ritual of summer vacations, signs of revival appeared abundant. Many European economies have grown strongly with the return of people to shops, restaurants and vacation destinations. Most optimistic economists have started celebrating a so-called V-shaped recovery, with a rebound just as steep as the plunge that preceded it.
Hopes had also been bolstered by a historic agreement reached by the European Union to raise a 750 billion euro ($ 883 billion) relief fund through the sale of bonds collectively backed by all members. The move transcended years of resistance from indebted Northern European countries, while signaling that the European bloc – generally little known for its cooperation in the face of the crisis – had reached a new state of solidarity .
But most economists have assumed better days will only last as long as the virus can be contained. The restrictions imposed by governments seemed less important than the willingness of consumers to interact with other people, to return to workplaces and shopping areas.
In a report released this week, Oxford Economics, a London research institution, analyzed data from the euro area, noting that much of the improvement in late summer was the result of the upturn in prices. factories after closures. In order for the expansion to continue, people have to buy the products produced by the factories. Willingness to spend is influenced by confidence – people feel safe enough to move; if they fear losing their job.
In September, as cases of the coronavirus rose again, consumption fell.
“With the health situation unlikely to improve in the short term, we expect the recovery to slow again in the coming weeks,” concluded the report, written by Moritz Degler, senior economist at Oxford Economics.
The economic downturn is unfolding just as some European economies are starting to cut back on the extraordinary sums they have spent to protect workers from unemployment, raising concerns about a seemingly inevitable rise in unemployment.
In Britain, the government, led by Prime Minister Boris Johnson, is aggressively subsidizing the wages of companies affected by the pandemic as long as employers do not fire their workers. The public was covering 80 percent of wages when the program began in the spring. Even after gradual easing, the government is paying 60% of the cost this month.
But the leave program, which cost the Treasury £ 39 billion (about $ 50 billion), will expire at the end of the month. Fiscal watchdog Rishi Sunak has expressed concerns over the size of Britain’s debt, while pledging to balance the books. Under a lean replacement program it announced last month, the government would only cover 22% of wages in the future.
But the rapidly deteriorating economic outlook forced Mr. Sunak to return to the well. On Friday, in anticipation of tighter limits for businesses, he announced a new leave program that would cover two-thirds of the salaries of businesses that are due to close as virus cases rise rapidly, which would also increase subsidies . The measures could be particularly important in industrial areas in northern England, where a wave of electoral support for the Conservative Party in last year’s election helped keep Mr Johnson in power.
Fears of declining fortunes in Britain were magnified by the possibility that the country could exit the European Union at the end of the year – completion of the tortuous Brexit process – in the absence of a agreement governing future trade. This would risk causing a chaos destroying jobs, especially in the ports.
Across the Channel, the fall has raised awareness that complex hurdles remain before the European Union relief fund can be administered, limiting prospects in worst-affected countries like Spain and Italy.
Spanish Prime Minister Pedro Sánchez on Wednesday announced a stimulus spending plan amounting to 72 billion euros ($ 85 billion), with four-fifths of the money to come from the European fund.
Spain may have to wait for this money. The fund is supposed to be up and running by January, but it will almost certainly face delays as members of the European Union debate the terms of its distribution – especially rules to force Hungary and Poland to comply. democratic standards of the bloc.
The continent’s prospects for recovery are further limited by rules that limit the debts of members of the European Union and limit spending. These restrictions have been suspended, but they will eventually return, limiting growth prospects.
Italy expects to receive 209 billion euros ($ 246 billion) from the European relief fund, but the government is also committed to reducing its public debt, which exceeded 134% of annual economic output by the end of the year. last year. Such austerity, just as the pandemic raises the costs of medical care, will almost certainly plunge Italy into a longer and deeper recession.