Europe Plunges Into Recession as Economy Suffers Record Contraction

A quiet Piazza del Duomo in Milan on Tuesday.

Photo: Passaro/Fotogramma/Zuma Press

FRANKFURT—Stringent lockdowns to prevent the pandemic’s spread weighed heavily on Europe’s economy in the second quarter, causing a record downturn that was even more severe than in the U.S., but the continent’s strategy of coronavirus containment coupled with aggressive stimulus is fanning hopes of a robust recovery.

The eurozone’s gross domestic product fell 40.3% annually in the three months through June, exceeding the U.S. economy’s 32.9% contraction, according to data published Friday. That is by far the sharpest decline since comparable records began in 1995, according to the European Union’s statistics agency.

However, recent statistics suggest Europe is having a “much bigger snapback and there are some indicators that it may be getting ahead [of the U.S.],” said Holger Schmieding, chief economist at Berenberg Bank.

The U.S. economy is being supported by a massive fiscal stimulus that will likely translate into a 2020 government budget deficit roughly twice as large as Europe’s, Mr. Schmieding added.

“The U.S. is paying with fiscal stimulus for its failure to tackle the pandemic decisively,” he said.

While the U.S. grapples with tens of thousands of new infections each day, Europe has largely brought the virus under control, even as it has eased restrictions and reopened internal borders, notwithstanding an increase in cases in countries such as France and Spain.

Confidence appears to be gaining among European consumers and businesses, supported by the billions that governments have lavished on job-protection schemes, aggressive stimulus from the European Central Bank, and a groundbreaking €1.8 trillion ($2.1 trillion) spending package unveiled by EU leaders last week.

The EU stimulus will push up economic growth in Greece, long one of the continent’s weakest performers, by about 2 percentage points a year for the next six years, the country’s central bank governor, Yannis Stournaras, said.

“It was something unexpected, so this is going to have a very positive impact on the Greek economy,” Mr. Stournaras said this week.

The euro has been on a tear against the dollar in recent weeks, rising close to a two-year high. That reflects both investors’ confidence in Europe and the U.S.’s uneven progress in halting fresh virus infections.

“The business in Europe has been and currently is stronger than in the U.S.,” Bjørn Gulden, chief executive of German sports-goods maker Puma SE, told reporters Wednesday. In the U.S., demand has varied widely from state to state, he said.

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Europe has kept its coronavirus cases low after reopening. Measures like mask wearing have been credited for the early success.

However, analysts at Commerzbank expect the U.S. to remain ahead, with its economy seen contracting by 4.5% for 2020 overall, versus 7% in the eurozone. The U.S. economy will likely grow by 4% in 2021, compared with 5% for the eurozone, they said.

Lakshmi Mittal, CEO of ArcelorMittal, the world’s largest steelmaker, said that according to his order books, the U.S. was pulling slightly ahead.

“The U.S. is recovering faster than Europe, we are seeing that from our customer bases,” Mr. Mittal said, attributing this primarily to American auto makers.

Europe still faces challenges. The region is highly dependent on exports and tourism, neither of which will recover fully until the virus is under control around the world. In Southern Europe, businesses tend to be smaller and more vulnerable, and governments need to service debts that have been inflated by the mammoth costs of containing the pandemic.

Borrowing costs have so far been kept in check by aggressive government-bond purchases by the ECB, but central-bank officials have stressed that support is only temporary.

Pockets of infection are resurfacing, including in northeastern Spain, dealing a blow to the nation’s large tourism sector. Foreign tourism makes up around 14% of GDP in Greece, 12% in Portugal and 8% in Spain, according to research firm Capital Economics.

Tourists are staying away, with occupancy rates of holiday accommodation below 30% in Italy, Greece and Spain. Spain lost one million jobs between April and June, its biggest ever quarterly decline, and the unemployment rate rose to a two-year high of 15.3%, official data indicated Tuesday.

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That is widening the divide between Europe’s industry-rich North and its poorer South, whose economies had to contend with a worse health crisis, a deeper economic collapse and high debts that deter intensive stimulus. Spain’s economy contracted by 18.5% in the second quarter versus the previous three months, and Italy’s by 12.4%, as Madrid and Rome imposed some of the world’s strictest lockdowns.

Germany’s economy performed better, shrinking by 10.1%, due to a relatively light lockdown and aggressive government spending.

McDonald’s Corp CEO Chris Kempczinski said Tuesday he saw strong opportunities in Europe, “where I think there may be some independent restaurant units that are having some bigger challenges.”

He added that: “In many markets around the world, most notably in the U.S., the public-health situation appears to be worsening.”

In France, the EU’s second-largest economy, consumer confidence unexpectedly dropped in July amid signs of a rebound in Covid-19 infections, a monthly survey suggested Wednesday. The French economy contracted by 13.8% in the second quarter versus the previous three months amid weak exports and household consumption, official data showed on Friday.

Still, recent French data suggest “a V-shaped recovery is on the cards for the third quarter,” said Julien Manceaux, an economist with ING Bank.

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Europe’s governments face a challenge in how to withdraw massive emergency support measures like job-furlough schemes and credit guarantees without hurting the economic recovery. These programs are costly and over time they could keep alive businesses and jobs that should disappear, but governments can’t immediately pull the plug, said Marion Amiot, an economist with S&P Global Ratings in London.

But recent mobility data from Google suggest that Europeans are currently more willing to shop than Americans. Some European households have accumulated savings that they can now spend, since many were paid but confined to their homes, said Ms. Amiot.

In Italy, business confidence rose in June, with more private firms at any time since late 2018 expecting an increase in profit over the next year, according to IHS Markit.

Fiat Chrysler Automobiles NV has been ramping up production over the past few months after completely shutting down its factories in mid-March as Italy battled what at the time was the world’s worst coronavirus outbreak. About three-fourths of employees in production who were working at the end of February are back in the factories. Several of the company’s large Italian assembly plants, including one in the deep South that produces the Jeep Renegade and Compass as well as the Fiat 500X crossover, are working at full capacity.

Volkswagen AG sales chief, Christian Dahlheim, said Thursday there was a clear positive trend in Western Europe as restrictions loosened and car dealerships reopened. In Germany, order entries for June were above last year, he said.

The recovery is less pronounced in the U.S. than in Europe, partly because demand there didn’t collapse quite as dramatically as in Europe during the shutdowns, Mr. Dahlheim said.

Write to Tom Fairless at tom.fairless@wsj.com

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