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European economy gains momentum for recovery, but uncertainties persist

(Xinhua)    09:57, August 10, 2020

After bottoming out in April when unprecedented COVID-19 lockdowns and restrictions unfolded across Europe, the European economy, which appears to be gaining momentum recently, has showed signs of recovery against several main indicators.

However, the European Central Bank (ECB) has characterized the recovery so far as "uneven and partial," noting uncertainties surrounding the evolution of the pandemic and the economic outlook for the euro area, where there are 19 member states that contribute to more than 85 percent of the European Union (EU)'s gross domestic product (GDP).

In that context, how quick, resilient or sustained could the European economic rebound be?

According to the ECB's projection, economic activity in the eurozone is unlikely to return to the pre-COVID-19 level by the end of 2022, indicating a quite protracted process of recovery, for which more stable and mature China-EU ties should be beneficial.

ECONOMIC REBOUND

The European economy has slid into a severe recession in the first half of 2020. The European economy shrank dramatically in the second quarter after negative growth in the first, with the seasonally adjusted GDP dropping quarter-on-quarter by 12.1 percent in the euro area and by 11.9 percent in the EU respectively, which marks the sharpest declines observed since 1995, according to the EU's statistical office.

Germany, the largest economy in Europe, has seen the largest three-month decline since the beginning of quarterly GDP calculations for that country in 1970, while France, Italy and Spain have all registered double-digit slumps.

Luckily, there are now signs of recovery.

According to the data released by Eurostat on Wednesday, the European retail trade volumes in June have returned to the level before the start of containment measures. The purchasing managers' index (PMI) for the eurozone's manufacturing sector rose to 51.8 in July, up from 47.4 in June, which IHS Markit says is the first expansion of the euro area's manufacturing economy since one and a half years ago. And for the third month in a row, investor sentiment in the eurozone has improved, showed the Sentix index, which surveyed more than 1,000 investors.

"Eurozone factories reported a very positive start to the third quarter, with production growing at the fastest rate for over two years, fuelled by an encouraging surge in demand," said Chris Williamson, chief business economist at IHS Markit.

The eurozone economy is projected to contract by 8.7 percent in 2020 before recovering at an annual growth rate of 6.1 percent next year, said the European Commission in its summer forecast, while the 27-member EU economy is forecast to contract by 8.3 percent in 2020 and grow by 5.8 percent in 2021.

Following the path of rebound since May, European economic growth is expected to return to positive territory in the second half of 2020, which seems to be supported by several recent indicators.

LINGERING UNCERTAINTY

Investors expected the recovery in the euro area to continue after lockdown but not lead to a complete "recovery" of the economy, according to Sentix, as many uncertainties still persist, overshadowing and complicating the path of recovery.

"There are two main sources of uncertainty today," said Christine Lagarde, president of the ECB, namely how the economy will recover from the pandemic, and how the economy will change in response to COVID-19.

Foremost specifically, the scale and duration of the pandemic, and of possibly necessary future lockdown measures, remain essentially unknown, as underlined by the European Commission.

Although from a current perspective, European governments, institutions and enterprises forecast economic development widely based on the assumption that lockdown measures will continue to ease and no 'second wave' of infections or re-lockdown will happen, fears have been mounting recently as new infections resurge across Europe.

Secondly, medium-term risks to financial stability have increased markedly in the euro area even if a systemic financial crisis is not yet in sight.

The vulnerabilities for the euro area financial system lie in the tightening of financial conditions, significant increases in debt burdens, weaker bank intermediation capacity and profitability and liquidity concerns among vulnerable non-banks, showed the ECB's Financial Stability Review.

Thirdly, the European labor market could suffer more long-term adverse effects as liquidity difficulties could turn into solvency problems for many companies.

Analyzing downside risks in a recent survey, the Munich-based ifo Institute underlined that the liquidity situation of many companies in the eurozone is deteriorating rapidly, warning that an unexpectedly high number of insolvencies might disturb the economic recovery and cause bigger than expected problems for the banking sector.

Moreover, subdued global trade coupled with turmoil, as well as damage in supply chains, continue to weigh on foreign demand for goods and services from Europe, and it remains unclear how quickly consumption behavior in Europe can extensively normalize.

CHINA-EU TIES

Not only in COVID-19 containment, but also in economic recovery and transformation, China and Europe as reliable and mutually supportive partners are widely believed to share common interests when it comes to strengthening bilateral ties and promoting win-win cooperation.

Since the COVID-19 outbreak, China-Europe freight trains have been playing a crucial role in supporting Europe's anti-pandemic fight by opening "green passages" for the transport of important supplies and raw materials, as well as in bringing an impetus to economic resumption in the Eurasian continent by stabilizing trade and supply chains.

With a total of 5,122 trains operating on the route, up 36 percent year on year, the number of China-Europe freight trains rose significantly during the first half of this year, according to the China State Railway Group.

Beyond that, China provides Europe with increasingly more cooperation opportunities, notably in those future-oriented and innovative fields, and development space, as it continues to deepen reforms and expand opening up.

In terms of digitalization for example, German luxury automaker BMW and Chinese Internet giant Tencent announced new digital cooperation in July.

Jochen Goller, president and chief executive officer of BMW Group Region China, said at a recent online event, "China will obviously play a leading role in shaping the future of mobility. So, we are and will continue investing in China." 

(For the latest China news, Please follow People's Daily on Twitter and Facebook)(Web editor: Wen Ying, Bianji)

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