Europe’s recession inevitable as last line of defense crumbles

Bloomberg

There’s 1,000 miles and a body of water between Mark McGowan and the Italian epicenter of Europe’s coronavirus outbreak. He may as well be next door. His 16-room hotel, the Scholars Townhouse in Drogheda, north of Dublin, has seen a 60% drop in room revenue. The business market “just melted away overnight,” he said.
“We have three people at reception and what struck me is the silence. You don’t hear the keyboards being hit anymore” the 37-year-old said. “It’s not looking good for the summer.”
The pandemic is dealing a crushing blow to the euro-area services industry, which makes up three quarters of its economy and whose resilience was crucial to offset a manufacturing slump last year. With the outbreak forcing airlines to cancel flights, governments to suspend schools and impose nationwide lockdowns, the first recession since 2013 appears all but inevitable.
While Italy is the worst hit by the virus with more than 25,000 cases, the pain is fast spreading across the region’s biggest economies. France has closed non-essential businesses and Spain has declared a national emergency. Germany has yet to impose a national lockdown, but it may only be a matter of time. Berlin, the capital, has announced its own strict measures.
In addition to schools and restaurants being shuttered, entire sporting tournaments have also been suspended. Ireland’s government called off public events for St. Patrick’s Day, the country’s national holiday on March 17, an event worth millions of euros to the economy.
Companies from Airbnb Inc. to British Airways Plc are scrambling to respond, updating their cancellation and refund policies. Deutsche Lufthansa AG is expected to seek a loan from Germany’s state-run bank, according to a person familiar with the plan. As a last resort, the government could also purchase a stake as part of a rescue.
Economists have slashed their forecasts for the euro area and many see a recession as the most likely outcome in the first half of the year, even as governments pledge to spend billions to support companies and households.
A recovery hinges on the efforts to contain the outbreak being successful, but it’s unclear how quickly the lockdowns will slow the spread of the virus. The European Commission says the economy could shrink by 1% this year.
The dire situation has turned the world upside down in a matter of weeks. Central banks have been forced back into monetary easing and the European Union may suspend fiscal rules to allow for stimulus. Even Germany, averse to deficits, pledged to spend whatever is needed to combat the economic impact.
EU finance ministers meet in Brussels on Monday to decide on their response to prevent a short-term hit from becoming a crippling, long-term slump. The key is to help firms cover costs and get through a squeeze on cashflow until situation improves.
“We want to ensure that we are able to preserve our companies, able to preserve jobs as much as possible so we avoid more lasting damage to the economy,” Commission Vice President Valdis Dombrovskis said.
Economic data isn’t yet capturing the full magnitude of the fallout, but signs are creeping into reports. In the monthly Purchasing Managers’ Index for February, services firms said foreign demand for business fell the most in five months. The next release, due in less than two weeks, will probably tell an even gloomier tale.
“Tourism and retailers — those two sectors are the ones that are going to take a big hit,” said Nicola Nobile, a Milan-based economist with Oxford Economics. “You basically go out if you want to buy food or go to the pharmacy. You’re not going to buy a computer or a fridge or a washing machine.”
As governments announce more and more dramatic measures to halt the spread of the virus, executives at companies around the region say they hope that the actions, though painful, will prove successful.
Margarida Almeida, chief executive officer of Portugal’s Amazing Evolution Management, said she’s trying to remain optimistic even after some group cancellations at the 20 hotels it runs.
“I think it’s a temporary situation,” she said. “I want to believe that.”