Euro area: Taking stock of the economic fallout from Covid-19

Euro area first quarter GDP recorded a big decline, even exceeding the contraction in activity seen at the apex of the financial crisis early 2009. Unfortunately, we will see an even bigger decline during the second quarter, and we have revised our 2020 growth forecast to -9% after -7% previously. The main reason behind th e downward revision is that containment measures have been longer in place than we initially thought , inflicting a bigger damage on the economy . We continue , however, to forecast activity to rebound in the third quarter as we expect most of the current containment measures to be lifted during Q2 . Strong fiscal and monetary stimulus for the economy will ensure that the economy will be able to “re-open” once most lockdown measure have been cut back – this process is already starting . That said, the rebound in activity we expect in Q3 will get the economy only half-way to its pre-crisis level . T he level of GDP will be still around 5% lower by the end of 2020 when compared to Q4:2019 . The risks to the outlook remain to the downside at this stage and relate to three factors. First, containment measures could be longer in place, or reinstated on the back of a new wave of infections . Second, a rise in perceived uncertainty could lead to higher private sector savings and less investment spending. Finally, higher corporate leverage could weigh on investment spending. While it is difficult to quantify any of these risks at this stage , they are implicitly incorporated in our forecast and explain the long way back to normal.