Could COVID-19 coronavirus trigger a European recession?
Fears over the impact of coronavirus on the European economy are mounting as cases of the disease in Italy increased dramatically in the past week.
It’s already influenced stock markets, with the FTSE 100, the French CAC and the German DAX falling nearly 3% on Thursday.
US stock markets also fell significantly on Thursday with the Dow Jones dropping nearly 1,200 points and the S&P 500 dropping 4% in a single day.
If they continue to fall, it could influence consumers whose wealth is tied to the stock market and impact spending.
Stocks fell as the virus continued to spread overseas with Italy confirming hundreds of cases of the novel coronavirus COVID-19 and placing nearly twelve towns on lockdown in the north of the country last weekend.
“At the moment in Italy we are already seeing some negative effects on activities related to tourism, such as accommodation and restaurants,” said Nicola Nobile, Oxford Economics’ chief Italian economist.
The four provinces in Lombardy that are most heavily affected by the virus represent 12% of the Italian gross domestic product (GDP) and 2% of the eurozone GDP, Nobile said, which he projected could impact at least 0.1% of GDP in the first part of the year.
“Other than tourism, we can also see some negative consequences [in some industrial sectors], given, for example, the highly connected supply chains in automotive,” Nobile added.
Depending on the outbreak, this shock could send an already weak European economy into recession, economists say.
“If this turns into a full pandemic, then the entire region is likely to fall into recession,” said Ángel Talavera, who is head of Europe economics at Oxford Economics, especially since the euro area is growing at a “very weak pace”.
A pandemic is defined as “the worldwide spread of a new disease” by the World Health Organization, but the international organisation has not yet declared COVID-19 as such.
“Italy is the obvious one most at risk for two reasons, because the outbreak is taking place there and because it’s the weakest economy in the region,” said Talavera.
“Germany is also at risk given that its economy has been bordering recession already for some time, and its large industrial sector is very exposed to the potential supply chain disruption that this could cause,” he added.
Tourism takes a hit
The French finance minister said in an interview with CNBC over the weekend that the tourism sector in France had already been hit due to coronavirus.
“We have fewer tourists, of course, in France, about 30%, 40% less than expected. That’s, of course, an important impact for the French economy,” French finance minister Bruno le Maire said.
Airlines are already feeling the impact after many cancelled all flights to mainland China. The International Air Transport Association estimated that Asian-Pacific carriers could lose an estimated $27.8 billion (€25 billion) in 2020.
If it hinders airlines having a normal summer operation, “then it will have a significant implication, not just for us, but also for the industry as a whole,” Scandinavian Airlines CEO Rickard Gustafson told CNBC.
Lufthansa announced measures to lower costs after sustaining losses from cutting flights to China.
China influences the global economy
The EU’s economic commissioner told Euronews earlier this month that the longer the duration of the epidemic, the harder the impact of it, will be, especially because as China is such a large player in the world’s economy.
“The importance of the Chinese economy in the global economy it’s enormously changed since the last epidemic that we had in 2003 that was the SARS epidemic. The Chinese economy was at the time 4% of the global economy, it is now almost 18% of the global economy,” said economic commissioner Paolo Gentiloni.
“So if we have a problem in China, we will have spillover of this problem on supply chains of manufacture on travel on tourism [and] on other sectors.”
Many economists say that global supply chains will be affected and global growth will slow during at least the first part of the year.
The spokesperson for the International Monetary Fund stressed that there was “uncertainty” about the global economy, but said that the IMF is “likely” to downgrade “growth projections for the world”.
“Clearly, the virus is going to have an impact on growth. A lot just depends on the speed of recovery in China, in other countries, the spillover effect, the effects on supply chains and the extent to which other countries may be significantly affected,” said IMF spokesman Gerry Rice.