The public health crisis sparked by the new coronavirus ricocheted through Europe’s economy in the first quarter, causing a record decline that was more severe even than in the U.S., an ominous sign for the global economy.
The eurozone’s gross domestic product fell 3.8% versus the final three months of 2019, according to data released Thursday, as measures imposed to limit the pandemic’s spread stalled everything from schools to factories to churches.
The economy shrank by 14.4% on an annual basis, far exceeding the 4.8% contraction in the U.S. economy over the same period. That largely reflects Europe’s earlier and broader lockdown.
“The euro area is facing an economic contraction of a magnitude and speed that are unprecedented in peacetime,” European Central Bank President Christine Lagarde said Thursday. “Measures to contain the spread of the coronavirus have largely halted economic activity.”
The data, along with other fresh numbers from around the world, reflect the depth of pain the world economy is likely to experience for months to come. They underscore the tough decisions facing Western policy makers, many now trying to reopen their economies while protecting people against new surges in infections.
A flash mob organized by merchants and shop owners in Turin, Italy, one of Europe’s hardest-hit countries by the coronavirus.
Photo: alessandro di marco/ShutterstockThe data also expose divergences in the economic dislocations both within the eurozone and among major global economies, portending political friction even after the pandemic ends. Northern European countries, for instance, shrank far less than their Mediterranean counterparts.
The severity of the contraction in the eurozone, the 19 countries that use the euro as their currency, augur more economic pain for the U.S. The U.S. had a surge in infections and lockdowns weeks later than did hard-hit European countries such as Italy and Spain.
Indeed, economists expect to see an even sharper fall in the eurozone during the second quarter. With restrictions in a number of countries only starting to ease in May, a larger chunk of second-quarter output will be lost than in the first quarter. Ms. Lagarde said the three-month drop through June could be almost four times as large.
On Thursday, the European Central Bank signaled its willingness to expand its efforts to buffer the impact of the economic crisis, including a €750 billion ($820 billion) program to buy the bonds of governments that are themselves spending huge sums to support their economies.
France was among the hardest hit by a nationwide lockdown announced on March 17. The 21% annualized economic contraction recorded in the first quarter was the largest since records began in 1949, exceeding the decline in 1968, when the economy was slammed by factory strikes and student protests.
Some rebound in activity in the eurozone is expected in the second half of the year, but economists no longer expect the lost output to be quickly recovered. ECB economists expect the economy to shrink by between 5% and 12% this year, Ms. Lagarde said.
One unknown is how rapidly consumers will return to normal patterns of behavior after the restrictions have been lifted.
“Fear of renewed outbreaks could make households more cautious,” said Olivier Vigna, an economist at HSBC.
The eurozone’s northern members appear to have suffered more modest declines than their southern counterparts. Austria reported an annualized decline of 9.6%, while Italy’s GDP fell by 17.6% and Spain’s by 19.2%. Germany won’t release its estimate for growth until mid-May, but economists estimate its contraction was closer to Austria’s than Spain’s.
That widening divide poses a challenge to the long-term viability of the euro, since it feeds political tensions over how and whether to share the burden of the coronavirus pandemic.
In Italy, corporate revenues will fall 20% this year, according to consulting firm Cerved Group, with some sectors, such as tourism, expecting a 75% decline. The failure of companies to service their debts could push nonperforming loans at banks to €189 billion from €73 billion, according to Cerved figures.
Emanuele Orsini, head of a group of Italian furniture producers, says member companies struggle to deliver products because of continued restrictions. Producers have been squeezed between suppliers demanding payment and customers who have delayed their own payments amid the draconian shutdown Italy imposed. “It’s a disaster,” he said.
A divide in economic fortunes could also emerge globally. South Korea’s economy has held up remarkably well, suffering only a 5.5% annualized contraction in the first quarter. Unlike Europe, it didn’t impose a broad lockdown, instead relying on voluntary social distancing and widespread testing to identify, trace and isolate infected people.
Still, the interconnectedness of the global economy will insulate few from the pain.
On Thursday, an index of manufacturing purchasing managers in China reflected pessimism. While Chinese factories increased output, exporters had lower expectations about demand from overseas trading partners.
In Europe, governments have launched a series of programs designed to limit the longer-term damage to economic growth, such as loan guarantees to help keep businesses afloat and plans to cover wage bills for furloughed workers as long as companies keep those employees on the books.
Germany’s labor agency Thursday estimated that the program could soon help pay the wages of 10.1 million workers, three times the numbers supported in the aftermath of the 2008 financial crisis.
Even as economies begin to reopen, the continued disruption from the pandemic is cascading through Western societies. Carla Gómez, a 31-year-old school-lunch monitor in Barcelona, said the private school she worked for didn’t renew her short-term contract after schools closed in Spain in mid-March. She is hoping to be rehired, but the uncertainty unnerves her. “I don’t know what we are going to do if this situation lasts for long,” she said.
Marcos Fernández, a 37-year-old Spaniard, lost his temporary job as a waiter when his restaurant closed last month. He receives €700 a month in unemployment, but only for the next 5 months.
“One day you think they will offer you a permanent position and the next one you are out,” he said.
—Tom Fairless in Frankfurt, Giovanni Legorano in Rome and Xavier Fontdegloria in Barcelona contributed to this article.
Corrections & Amplifications
The European Union’s statistics agency Thursday said that eurozone gross domestic product was 3.8% lower than in the final three months of 2019. An earlier version of this article misstated the day as Friday. (Corrected on April 30, 2020)
Write to Paul Hannon at paul.hannon@wsj.com
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