Because many European countries have extended lockdowns and foresee only a gradual loosening of social distancing to combat the coronavirus pandemic, S&P Global Ratings now forecasts a deeper recession than we did just about three weeks ago.
We now assume eight weeks of lockdowns on average (up from six previously) and a much more gradual reopening.
“Another set of factors informing our more pessimistic outlook is linked to a worsening external environment,” said S&P Global Ratings Senior Economist Marion Amiot, in the report published today,“Europe Braces For A Deeper Recession In 2020.”
We now expect global growth to shrink by 2.4% this year versus an increase of 0.4% previously. Notably for Europe, we now forecast a deeper recession in the U.S., the main destination for the region’s exports.
“Also, lower world oil prices, if they last, might dampen external demand in OPEC and Russia, which together account for more than 7% of European goods exports–half as much as the U.S.,” said EMEA Chief economist Sylvain Broyer.
This will undermine some of the benefits Europe is deriving from the lower inflation associated with lower oil prices and means that the eurozone recovery will take longer than we had initially expected.
We believe how economies perform in coming months will depend on:
- How restrictive the lockdowns are.
- How reliant a country is on services.
- How much fiscal support a country extends.
Since we last published toward the end of March, we’re seeing a further increase in fiscal and monetary support in the eurozone and the U.K. The EU fiscal response is not only much larger than during the financial and eurozone crisis, amounting to about 4.8% of eurozone GDP, it also contains some new elements. That said, the question of financing the EU package remains unclear. A potential EU recovery fund, up for discussion in the next weeks, could be better suited to the current economic shock.
“Looking ahead and under the assumptions above, we expect the eurozone economy will have recovered only two-thirds of its losses by 2021, and to return to trend growth only in 2023,” said Ms. Amiot.
We see mostly downsides to our forecast:
- The pandemic could evolve differently than we currently assume and could resurge.
- Financing conditions could worsen.
- Europe’s external environment could worsen further if the economic impact of the pandemic is more pronounced in the U.S. or Asia, Europe’s main trading partners.
On the upside, an enhanced fiscal response at the EU level, such as through a common eurozone recovery fund, would provide a positive signal for the viability of the eurozone and could help speed up the economic recovery in Europe.
This report does not constitute a rating action.