Onward, upward for the eurozone economy and currency

Executive Summary

• The Eurozone economy suffered a record decline in activity in the second quarter, although there are some early, encouraging signs the Eurozone finished Q2 and started Q3 with a reasonable degree of momentum.
• We see reasons for the recovery to persist, including the response of monetary and fiscal policymakers as well as progress in containing the spread of COVID-19. Despite the large fall in Q2, we are not inclined to make major changes to our 2020 GDP forecast, which looks for a decline of 7.7%.
• The more constructive prospects for the Eurozone economy suggest upside risks to our medium-term euro outlook, although there are some potential downside risks for the euro in the near term.

Eurozone Economy Shuts Down in Q2

The negative effects of COVID-19 for Europe’s economy have been apparent for some time, and last week’s GDP figures confirmed a historic collapse in the Eurozone economy. The initial estimate of Eurozone GDP showed a fall of 12.1% quarter-over-quarter in the second quarter, almost four times greater than the previous largest quarterly decline, while on an annual basis GDP was down 15% year-over-year. As historic as the Q2 slump was, it was in line with the consensus forecast, though a bit larger than the fall we had anticipated.

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