New Coronavirus Restrictions in Europe Could Trigger a Second Recession

November 2, 2020
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After slipping into a recession earlier this year, Europe bounced back with a record third quarter. The EU saw GDP increase by 12.1% from July to September. The expansion was the biggest recorded in more than two decades.

While the comeback was strong, Europe’s economy is still down by around 4% from where it was this time last year. Things could get worse with new Coronavirus restrictions now implemented in France, Germany, and the United Kingdom.

Coronavirus Restrictions Will Slow Economic Activity

Both France and the United Kingdom announced new one-month lockdowns last week. Rising Coronavirus cases have renewed the strain on healthcare systems, forcing European governments to act.

Much of the European continent is now facing what many call a ‘second wave’ of infections, which is similar to what is being seen with rising cases in the United States.

Millions of Europeans will be limited to essential travel for work and medical care. Large social gatherings have been banned, and elderly people have been advised to stay at home for anything except essential services.

Germany, the largest single-state economy in Europe, has also announced new lockdown restrictions that will partially limit commercial activities outside of construction and manufacturing. Germany’s economy is 4.2% smaller today than it was a year ago.

The European Central Bank has pledged more stimulus “as appropriate” to offset any slowdown. It is already engaged in a $1.35 trillion asset purchase program and could add billions more to keep markets from going into freefall.

The European Union has pledged almost $1 billion for a Coronavirus recovery fund that will make loans available for nations that have become heavily indebted during the health crisis.

Europe’s Economy Directly Affects America

Europe is one of America’s major trade partners and a major buyer of U.S. exports. Germany makes up 4.5% of America’s international trade, while the United Kingdom contributes around 3.4%. France and the Netherlands, both members of the EU, are also among America’s Top 10 biggest trade partners.

If Europe’s economy falters, American exporters will likely experience declines in revenue. European stocks will likely fall if the EU enters another recession, and this could have a knock-on effect on U.S. equities.

Investors with European holdings should brace for slow growth in the fourth quarter. The wider group of American investors should follow the news cycle closely, as Europe’s financial situation is likely to affect confidence on this side of the Atlantic.

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