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Euro zone sees biggest contraction in Q2 GDP

In the months from April to June, growth in the 19-country currency bloc shrank by 12.1% from the previous quarter

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In Spain, a bad summer season took a turn for the worse when the UK announced holidaymakers returning from there would have to be quarantined.

Brussels, Paris

THE euro zone's economy recorded its deepest contraction on record in the second quarter, preliminary estimates showed on Friday, while the bloc's inflation unexpectedly ticked up in July.

In the months from April to June, gross domestic product in the 19-country currency bloc shrank by 12.1 per cent from the previous quarter, the European Union's statistics office Eurostat said in its flash estimates.

The deepest GDP fall since the time series started in 1995 coincided with coronavirus lockdowns which many euro zone countries began to ease only from May. The contraction was slightly more pronounced than market expectations of a 12 per cent fall, and followed the 3.6 per cent GDP drop recorded in the first quarter of the year.

Among the countries for which data were available, Spain posted the worst output slump, with its economy shrinking by 18.5 per cent quarter-on-quarter, worse than expected and wiping out all the post-financial crisis recovery of the last six years. GDP in Italy and France also fell sharply but less than forecast, respectively by 12.4 per cent and 13.8 per cent.

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Inflation continued instead its upward trend, defying expectations of a slowdown, supporting the European Central Bank's (ECB) expectation that a negative headline reading may be avoided.

Eurostat said consumer prices in the bloc rose 0.4 per cent on an annual basis in July from 0.3 per cent in June and 0.1 per cent in May. Economists polled by Reuters had forecast a 0.2 per cent increase in July.

Underlying price pressure also accelerated. Excluding volatile food and energy prices, a key measure watched by the ECB, inflation rose by 1.3 per cent from 1.1 per cent in June, Eurostat's flash estimates showed.

Spain

The country's record 18.5 per cent drop in output - led by plunges in consumer spending and investment - is the deepest reported so far in Europe, where restrictions to control the coronavirus battered businesses and households. Economists had anticipated a 16.6 per cent contraction.

Spain's figures put the spotlight on southern European countries that suffered the most from the pandemic after entering the crisis with already-strained public finances. Europe's fourth-largest economy had one of the continent's earliest and deadliest outbreaks of the coronavirus, along with Italy, and the government responded with a strict lockdown. Both countries are heavily reliant on tourism, a sector that's been slammed by the pandemic.

In Spain, a bad summer season took a turn for the worse when the UK announced last weekend that holidaymakers returning from there would have to quarantine because of an uptick in coronavirus cases in regions such as Catalonia.

The hardest-hit sectors were retail, transport, restaurants and bars, which together plunged 40.4 per cent.

The Spanish economy has been particularly affected by the crisis because of the relatively small size of its companies, which leaves them more vulnerable and less capable of effectively responding to the shock. Business associations expect tens of thousands of small and medium-sized companies to go bankrupt before the end of the year.

Italy

While Italy fared better than economists had expected, its fragile economy was already heading for recession before becoming Europe's first epicentre of the pandemic.

Forced to spend billions of euros on health and economic aid, it has become even more reliant on massive bond purchases by the ECB to keep financing costs in check.

Italian Finance Minister Roberto Gualtieri said activity has been recovering in June and July. But the economy will still probably shrink about 9.5 per cent this year and grow only 4.8 per cent next year, according to the Bank of Italy's latest estimates.

France

The French economy contracted by a record 13.8 per cent in the second quarter under the impact of coronavirus lockdowns, the national statistics institute INSEE said. The seasonally-adjusted quarter-on-quarter drop in GDP was better than forecast but worse than the performance of most of its euro zone peers.

The second quarter figure means the French economy has been shrinking for three consecutive quarters, and continues to be in recession. France's second-quarter contraction was much sharper than the record 10.1 per cent fall in Germany. Austria suffered a 10.7 per cent contraction and Belgium 12.2 per cent.

Domestic consumption is the main driver of the French economy, and household consumption fell 11 per cent during the quarter. Investment fell by a greater amount - 17.8 per cent. Unsurprisingly given the lockdowns and travel restrictions hitting international tourism, there was a nearly 46 per cent drop in transportation and a 57 per cent drop in the restaurant and hotel sector. REUTERS, AFP

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