Eurozone Economy Approaching the Growth Cliff

Executive Summary

• Today’s release of the Eurozone manufacturing and services PMIs in our view provides the clearest indication yet of the economic damage the Eurozone economy could suffer from the COVID-19 virus. The March services PMI slumped to a record low, while the manufacturing PMI also fell sharply.
• While the prospective economic downturn looks to be quite broad-based, the declines in service sector output are likely to be particularly noteworthy. Should the PMI surveys stay around current levels, or fall further, a Q2 GDP decline of more than 8% quarter-over-quarter annualized, perhaps extending into a double digit decline, appears well within the realm of possible outcomes.
• Considering the dire growth outlook, we expect a bias toward further Eurozone monetary and fiscal policy easing to persist. In this environment the euro could remain subdued in the nearterm, with little in the economic and policy fundamentals to suggest meaningful gains in the EUR/USD exchange rate for the time being

Europe’s March Confidence Surveys Highlight Economic Damage

Today’s data calendar saw the release of the Eurozone manufacturing and service sector PMIs for March, which we view as the most critical European data so far in terms of trying to glean insights about the economic damage from the COVID-19 virus. Until now, Eurozone economic figures have essentially been “pre-virus” data—for example, the PMI surveys held up quite well through February, while activity data (e.g. retail sales and industrial output) are available only through January.

The Eurozone March PMI surveys confirmed that the economic damage from the COVID-19 crisis will be very severe. The March services PMI fell to a record low of 28.4 from 52.6 in February, even weaker than the consensus forecast which was for a reading of 39.5. Meanwhile the manufacturing PMI also fell noticeably to 44.8 in March, from 49.2 in February. Other than representing dramatic declines, what could these results tell us about the potential for Eurozone GDP growth in Q1 and Q2? In this article we use the PMI surveys to estimate to potential order of magnitude of Eurozone GDP declines during the first half of this year. To be clear these do not represent precise forecasts, but rather a “ballpark” for where Eurozone GDP outcomes may end up.

The first step in developing our estimate is to understand the significance of various Eurozone economic sectors. For 2019, services output accounted for 73.5% of GDP, while industrial output accounted for 20% of GDP. The other sectors of the economy were much smaller, with construction output around 5% of GDP and agricultural output 1.5% of GDP. The takeaway is that if one is able to calculate reasonable estimates of the services and industrial sector, one has a reasonable estimate of the overall GDP outlook.

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