The decline compares with a 9.5 percent quarter-on-quarter drop in the US, which, unlike Europe, has not yet been able to get its contagion numbers firmly down and whose economic recovery is in doubt.

European Union flags flutter outside the European Commission headquarters in Brussels, Belgium, June 25, 2020.
European Union flags flutter outside the European Commission headquarters in Brussels, Belgium, June 25, 2020. (Yves Herman / Reuters)

The economy of the 19-country eurozone has contracted after it shrunk by a devastating 12.1 percent during the April-June period from the quarter before – the largest drop on record – as coronavirus lockdowns shut businesses and hampered consumer spending.

Economists say the worst of the downturn is past, as many restrictions have eased, but that the recovery will be drawn out and vulnerable to renewed virus outbreaks.

Spain, which along with Italy was among the first to get hit hard by the spread of the virus, suffered the region's heaviest drop at 18.5 percent. France, Italy and Portugal also endured steep declines, but no country escaped the impact of the pandemic.

For the currency union as a whole it was the biggest decline since the records started in 1995. The broader 27-country European Union, not all of whose members use the euro, saw output sag by 11.9 percent.

The decline in Europe compares with a 9.5 percent quarter-on-quarter drop in the United States, which unlike Europe has not yet been able to get its contagion numbers firmly down, and whose economic recovery is in doubt.

Stimulus measures

European governments are countering the recession with massive stimulus measures. EU leaders have agreed on an $858 billion or 750 billion-euro recovery fund backed by common borrowing to support the economy from 2021. National governments have stepped in with loans to keep businesses afloat and wage support programmes that pay workers' salaries while they are furloughed. The European Central Bank is pumping 1.35 trillion euros in newly printed money into the economy, a step which helps keep borrowing costs low.

Those support measures have helped keep unemployment from spiking. The rate rose to 7.8 percent in June from 7.7 percent in May. But many job losses will wind up being permanent despite the stimulus. Major companies such as Lufthansa, Daimler and Airbus have said they will cut thousands of jobs.

READ MORE: Europe's top economies falter as new virus clouds outlook

April and May worst hit

Economists say the downturn was concentrated in the months of April and May when lockdowns were most severe. 

Many restrictive measures have been eased, and business confidence in Germany, the biggest eurozone economy, has ticked up for three straight months.

READ MORE: Coronavirus drags German economy into record recession

But the outlook is for a long and uncertain climb back to pre-virus levels that could take until 2022 or longer. Company forecasts for the rest of the year assumed that there is not a renewed outbreak of Covid-19, the illness caused by the coronavirus. 

Cases have been rising again in several countries as people go on vacations, and Britain slapped a 14-day quarantine on travellers returning from Spain.

Rosie Colthorpe, European economist at Oxford Economics, said the current third quarter was likely to see high growth rates, “but not nearly large enough to make up for the damage.”

“Beyond this initial bounce, the recovery is set to be gradual and uneven,” with pre-virus output regained only by mid-2022, she said, adding that “recent flare-ups of the virus in several European countries risk derailing this recovery.”

The Spanish economic drop was by far the sharpest since the country’s national statistics agency began collecting data. Prime Minister Pedro Sanchez was meeting later on Friday with the leaders of Spain’s regions to discuss how to rebuild the economy and where to deploy billions of euros in European Union aid for recovery.

Germany, the largest of the countries that use the euro, went through a 10.1 percent decline, the biggest since records started in 1970.

In France, the startling plunge of 13.8 percent in April-June was the third consecutive quarter of contraction in France's worsening recession. The pain has been so damaging to jobs and industries that the government is talking down the possibility of another nationwide lockdown as infections tick upward again. Finance minister Bruno Le Maire called on French people to spend more to help the economy recover.

“All the growth in GDP seen in the 2010-2019 decade has been wiped out in five months,” said Marc Ostwald, chief economist at ADM Investor Services International. In Italy's case, economists said it wiped out about 30 years of growth.

European shares recover

European shares recovered from their lowest levels in a month on Friday, as investors looked past the severe economic contraction and on to company earnings, while the euro reached its highest in more than two years, set for its best month in a decade.

The pan-European STOXX 600 rose 0.6 percent, though it was on course to end the month flat or lower. Technology shares led the rally, rising over 2 percent after Wall Street's tech giants, Apple, Amazon and Facebook, reported forecast-beating results overnight.

MS CI's All Country World Index, which tracks shares across 49 countries, was down 0.04 percent on the day.

ING strategists said the euro could hit $1.20 within the next few days. The single currency passed $1.19 on Friday, though it fell back below the handle by midday in London.

READ MORE: US signs $2B deal with Pfizer, BioNTech for Covid-19 vaccine doses

Source: TRTWorld and agencies