PHOTO: YVES HERMAN/REUTERS
The coronavirus now threatens the eurozone economy’s expected recovery, after a tough year marked by trade tensions, the exit of the United Kingdom from the European Union, and a slowdown in manufacturing.
Numerous uncertainties regarding the virus–how long it will last, how badly it will hurt China’s economy, and whether it will spread beyond Asia–make it tough to estimate its potential impact on the eurozone economy. Nevertheless, some banks have already downgraded their forecasts for eurozone economic growth in the first quarter.
Goldman Sachs said the coronavirus will cut GDP growth in the eurozone and the United Kingdom by 0.15 percentage points in the first quarter. In the two following quarters, it expects a rebound of a similar magnitude, leaving a net drag of 0.05 percentage points on the full year 2020. However, uncertainty regarding these estimates is high.
“The evolution of the virus itself is highly uncertain given significant variation in estimates of its contagiousness, the possibility that it might mutate and, perhaps most importantly, the effectiveness of the health authorities’ efforts at containment,” Goldman Sachs analysts said.
Capital Economics forecasts a small impact in the first quarter of less than 0.1 percentage points, but Europe Economist Melanie Debono warned of “a significant risk that the impact is bigger, in which case it could push the eurozone into contraction.”
Other forecasters have avoided publishing estimates due to the uncertainties surrounding the virus. UBS’s Europe chief economist Reinhard Cluse said it was “too early and too speculative” to lower eurozone growth forecasts.
The impact of the coronavirus on the eurozone depends on how long it takes before business gets back to normal and to what extent it harms consumer confidence.
“If the virus and the containment measures are over quickly, a rebound is to be expected. However a prolonged period of shutdowns in China may induce more structural damage that spills over to the EU,” said Timme Spakman, an economist covering international trade at ING.
The possibility of the virus spreading into Europe or the United States cannot be ruled out, ING warned.
Weakness in the eurozone manufacturing sector is already a major concern, and the rapid spread of the coronavirus has left any hopes of a rebound on shaky ground.
Germany, the eurozone’s economic powerhouse, is particularly vulnerable due to its reliance on exports. Data on Thursday showed German factory orders plunged by 2.1% during December, showing how weak the manufacturing sector was even before the coronavirus took hold.
“We expect the recovery of the eurozone manufacturing sector to be much more muted and to take longer than others anticipate,” Capital Economics’ Ms. Debono said.
China is not only an end-user of eurozone industrial goods, it is also embedded into global supply chains, so if Chinese factories remain closed, eurozone producers might struggle to source the parts for their own production, she said.
Even so, it is important not to overstate the impact. The epicenter of the coronavirus is a long way from Europe and its economic ramifications may be limited.
“The coronavirus can delay the manufacturing recovery, but it won’t kill it,” UBS’s Mr. Cluse said.
Write to Maria Martinez at email@example.com