With a third wave of the Covid-19 pandemic hitting some countries of the Eurozone forcing re-imposition of lockdowns and restrictions, the euro zone economy contracted in the first quarter of 2021.
According to preliminary data released by Europe’s statistics office Eurostat, there was a 0.6 per cent quarter on quarter drop in the gross domestic product in the region. This is second straight quarter of contractions which means that the region technically has slipped into a recession even though there was optimism about growth looking ahead.
During the first three months of the year, there was a decline in economic activity in most of the large economies of the region including Germany, Italy and Spain. Portugal reported the sharpest drop in in activity where a wave of new Covid-19 cases are being seen resulting the second lockdown in the country.
One of the exceptions was France, the second largest economy of the euro zone, as it reported better than expected growth of 0.4 per cent during the first quarter. The growth numbers of France will bring some reassurance going into the second quarter even though the growth numbers in France remained well below the pre-pandemic levels.
There was also a 0.3 per cent expansion in consumer spending in France during the first quarter even with the reintroduction of some restrictions related to the pandemic.
The economy could also grow more in the current quarter with easing of some restrictions such as allowing cafes, bars and restaurants to offer service outdoors from May 19 as announced by the French President Emmanuel Macron earlier this week.
In the same quarter however there was a 1.7 per cent contraction in the German economy w3hiuch was worse than the 1.5 per cent contraction that had been forecast by analysts and economists. A severe third wave of Covid-19 infections has hit the country which has been complicated by different approaches adopted to tackle the pandemic by the various regions of the country.
A 0.4 per cent contraction was reported for the first quarter in Italy which was slightly better than forecasts while there was a 0.5 per cent contraction in the Spanish economy over the same period. Portugal’s economic activity contracted by 3.3 per cent in the first quarter.
Looking ahead, however, economists are confident about 2021 for the euro zone.
“Confirmation that the euro-zone economy contracted again in Q1 (first quarter) means that the region suffered a second technical recession in just over a year,” analysts at Capital Economics said via email.
“The good news, however, is that things should get better towards the end of Q2 as the vaccination program will allow governments to lift restrictions, hopefully for the last time.”
The Covid-19 support packages are expected to be received by countries in the region by the beginning of the second half of the year. Plans for how they want to use the funds have been already submitted to the European Commission for analysis by a number of countries.
“It is important the plans are in line with our targets,” European Commission trade chief Valdis Dombrovskis said in a television interview.
The Commission has asked the member countries to spend at least 37 per cent of the stimulus amount on climate issue and 20 per cent on digital transformation.
“The funding will be available to member states once they complete certain milestones and targets,” he added.
(Adapted from CNBC.com)