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Euro sign at the ECB building in Frankfurt, Germany, 24 April 2020

The eurozone economy has fallen back into recession as the impact of the pandemic continues to hit activity.

European economies have been thwarted by an upsurge in infections this year and restrictions linked to Covid.

The eurozone fell 0.6% over the January-March period – the second consecutive contraction, which is a widely used definition of a recession.

This is the second episode of this kind, a so-called double-dip recession, since the start of the pandemic.

However, among the national economies that have reported data so far, this pattern has only been repeated by Italy.

Other countries have reported some growth in either of the past two quarters.

The French economy made good progress during the first three months of this year, by 0.4%, after a decline at the end of 2020, although the rebound was qualified by the national statistical office as “limited”.

In Germany, it was the reverse, with some growth in the fourth quarter of last year and a sharp decline – of 1.7% – revealed by the latest figures.

Some specific factors may have affected Germany.

Claus Vistesen of Pantheon Macroeconomics says the economy has been stung by a value-added tax (VAT) hike which has led to lower spending and construction.

A temporary reduction in VAT in Germany – intended to support the economy during the pandemic – ended at the start of the year.

Andrew Kenningham of Capital Economics also highlighted the supply disruptions plaguing the large German manufacturing sector, particularly the auto industry.

The bigger picture is a region where economic activity has again been held back by the spread of the virus and the restrictions imposed to curb it.

The figures are particularly gloomy in the case of Italy, where the economy is still 6.6% lower than at the end of 2019, before the pandemic.

However, the economic damage in this phase of the health crisis is less severe. Economic activity in the euro area during the most recent period was 11% higher than at the nadir of the second quarter of last year.

This confirms the idea that companies have found ways to reduce the impact of restrictions on what they do, although for some the effect is still severe.

In the future, this weak performance is expected to improve as vaccination programs allow further relaxation of restrictions and boost consumer confidence. This will be particularly important in southern Europe, where many businesses are expected to see a recovery in tourism.



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