Europe’s economic recovery faces slow down due to the new COVID-19 wave

Across many parts of the world, an unprecedented new surge in Coronavirus infections is delaying the process of economic recovery in the aftermath of the pandemic crisis. Since a potential vaccine against COVID-19 is months away from mass-production, world governments are forced to reimplement their lockdown measures to contain the spread of the virus resulting in the closure of businesses, people losing their jobs, and banks facing a higher risk of bad loans.

Due to renewed outbreaks in the first two weeks of August, economic activity declined sharply in various European countries including France, Italy, and Spain leading to the sluggish recovery. With infections risings across the bloc, the euro zone’s recovery has also slowed down along with a sharp deceleration of inflation.

“The rebound has lost almost all momentum,” said Chris Williamson, an economist at research firm IHS Markit.

As per recent estimates by Eurostat, the European Union’s GDP declined 11.7 percent in the second quarter of this year, while it fell 12.1 percent in the eurozone as compared to the previous quarter. Economists have also suggested that global output might not be to recover to its pre-crisis levels until the end of 2021 amid prevailing economic uncertainties. While there was an initial economic rebound in Europe in the month of June, economists have asserted that the resurgence of infections can potentially threaten the recovery of major parts of the bloc.

In August, Eurostat data also revealed that employment in the euro area decreased by 2.9 percent with a 2.7 percent decline in the EU27 in the second quarter of 2020, noting that virus containment measures are still underway in most member states. Economists have expressed serious concerns over massive layoffs in the coming weeks, even though a number of furlough schemes and government support plans are in place to safeguard the rights of the employees in the region.

As per the International Monetary Fund (IMF), the European economy will contract by more than 10 percent in 2020, before completely recovering by at least 6 percent in 2021. This is expected to happen even when the bloc is successful in avoiding a new wave of the pandemic. At the same time, IMP is also expecting that both Italy and Spain will experience economic downfalls of around 12.5 percent this year, noting that these two countries have the highest public debt levels and the most unstable banking system.

At the onset of the pandemic, Europe’s banking sector played a crucial role in keeping the economy from crashing. However, with the majority of emergency response depleting, banks are also in need of state support.

Speaking to media, former European Central Bank vice president and Portuguese economist, VítorConstâncio, expressed his fear there will be a deceleration of credit supply, which will result in a very sluggish recovery of the bloc’s economy.

Meanwhile, governments have been trying to support recovery with more stimulus spending.

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