By Richa Rebello
BENGALURU (Reuters) – The euro zone is on track for its first double-dip recession in nearly a decade, according to a Reuters poll of economists which points to a more muted recovery next year despite expectations for 500 billion euros (£447 billion) of additional monetary stimulus.
As most of Europe grapples with a resurgence in coronavirus cases, forecasters who last month predicted the recovery would continue now expect the euro zone economy to shrink 2.5% this quarter after expanding a record 12.6% in Q3.
That is a dramatic turnaround from expectations of 3.1% quarterly growth as recently as July, and compares with 2.1% predicted in last month’s poll.
With new lockdowns and widespread restrictions accompanying the second wave of infections, over 80% of respondents, or 44 of 55, said a double-dip recession was now underway.
“As downside risks continue to materialise and the health situation keeps worsening, it now looks evident the recovery in place in the euro zone economy since May has ended,” said Angel Talavera, head of European economics at Oxford Economics.
“The euro zone economy will suffer a double-dip recession in Q4. This is a relatively modest fall compared to the declines we saw in the first half of the year…however, uncertainty around those forecasts remains incredibly high.”
(GRAPHIC: Reuters Poll – Euro zone economic outlook – https://fingfx.thomsonreuters.com/gfx/polling/xklvybqgbpg/EZ2.PNG)
Most said shrinking gross domestic product (GDP) in the current quarter after a recession in the first half of the year signalled a double-dip, but a handful of economists stuck to the technical definition of two straight quarters of contraction.
At the peak of the first wave of the pandemic, only three forecasters predicted a double-dip recession of some kind.
The economy is forecast to grow 0.8% in the first quarter of next year, a touch lower than the 1.0% forecast last month.
It will shrink 7.4% this year, less than the -8.0% predicted in the October poll, but still by far the worst on record. The poll put 2021 growth at 5.0%, the weakest median expectation since a poll taken in May.
(GRAPHIC: Reuters Poll – Euro zone economic growth and inflation outlook – https://fingfx.thomsonreuters.com/gfx/polling/rlgvdajljpo/Euro%20zone%20economy.PNG)
While news of successful vaccine trials has sent stock markets back to record highs, economists were evenly split when asked if their latest forecasts were based on this recent progress. That suggests some upside potential for the recovery next year if the vaccines are ready for mass distribution.
In the meantime, the economy faces more trouble.
Poland and Hungary on Monday blocked the European Union’s 2021-2027 budget and historic 750 billion euro recovery fund due to be rolled out next year over a clause which makes access to money conditional on respecting the rule of law.
European Central Bank President Christine Lagarde made clear at this month’s policy meeting news conference and in a recent speech that another round of monetary stimulus next month is all but certain.
The latest Reuters poll expects the ECB’s Governing Council to top up its pandemic-related bond purchases by 500 billion euros at the Dec. 10 meeting, extending the programme by six months until December 2021.
That will take the total amount of pandemic-related purchases to 1.85 trillion euros.
Nearly 80% of respondents, 37 of 48, said the ECB would change the terms of its targeted long-term loans to financial institutions. They cited as possible changes: extending the term during which favourable conditions are applied; further lowering the rate it charges on them; or providing additional tranches.
Three-quarters of respondents, or 33 of 44, said the ECB would not increase its regular asset purchases in December, while nearly 85% of respondents, or 32 of 38, who responded to a separate question said it would not deploy any new instrument to adjust policy.
“The ECB president’s comments confirm a sizeable ECB stimulus package is still very much on the cards despite the positive vaccine news,” said Nick Kounis, head of financial markets research at ABN Amro.
Inflation, which the ECB targets at close to but just below 2%, was expected to be -0.3% this quarter, rising to 0.1% next quarter. Only a handful of economists predicted inflation would touch the ECB’s target before end-2022.
Most of the polling was conducted before news of Moderna Inc’s (O:MRNA) experimental vaccine with a 94.5% efficacy rate.
(Reporting and polling by Richa Rebello; Editing by Ross Finley, Kirsten Donovan)