Recession Deepens in Europe’s South Amid Lockdown Damage

(Bloomberg) -- Italy and Spain, the two European countries most severely hit by the coronavirus, are suffering even deeper slumps after record contractions in the first quarter.

Lockdowns that shut hotels and restaurants meant companies experienced unprecedented declines in output and new orders in April, according to IHS Markit's Purchasing Managers' Surveys. Jobs were also cut at the fastest pace in the index's 22 years.

Prospects for the next 12 months are equally dire, fueled by concerns that the many weeks of restrictions have inflicted long-term damage on the economy.

The grim figures come after data showed January-March economic output fell about 5% in Italy and Spain, and only slightly less in the 19-nation euro zone.

The European Central Bank has warned GDP in the bloc could decline as much as 15% in the second quarter, telling governments “joint and coordinated policy action” is needed to underpin an eventual recovery.

National efforts have allowed companies to furlough more than 40 million workers -- jobs that might have disappeared otherwise -- and provided hundreds of billions of euros in loans, grants and credit guarantees. A meaningful solution to share the financial burden of those rescues around remains absent though amid opposition from fiscally prudent countries including Germany, Austria and the Netherlands.

In Italy, the euro area's third-largest economy and also one of the region's most indebted, a PMI for services dropped to 10.8 in April. Spain saw its gauge slumping to 7.1, with hotels, restaurants and transport providers particularly badly affected.

The political wear and tear is starting to show too as the countries' embattled leaders try to maintain control amid pressure to let people get back to work and tensions within their coalitions. Italian Prime Minister Giuseppe Conte is facing speculation about how long he can survive after he was forced to apologize for delays in delivering aid. In Madrid, Pedro Sanchez faces a vote in parliament to extend his emergency powers Wednesday afternoon.

While the Spanish premier is likely to squeak through, the closeness of the vote shows the broad support he enjoyed in the early days of the lock down has now evaporated.

Major Impact

“Observing the sheer scale of the drop in many survey indicators lays bare the impact that the pandemic is having on Spain's economy,” said Paul Smith, IHS Markit's economics director. “We estimate the economy is currently contracting at a quarterly rate of around 7%.”

With virus infections slowing, Spain and Italy have started to ease some lockdown rules. In the former, people were allowed to exercise outside last weekend for the first time in seven weeks; in the latter, more than 4 million workers were cleared to return to work on Monday.

“With the gradual easing of restrictions planned to begin in early May, next month's data will give the first indication on how fast we can expect activity to recover in the short term,” said Lewis Cooper, an economist at the London-based firm.

Even in the best scenario, rebuilding the economy will take time. The International Monetary Fund predicts a euro-area slump of 7.5% this year, followed by growth of 4.7% and 1.4% in the subsequent two years.