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Chief economist update: COVID-19 causes double-dip

The Eurozone is back - back in recession, that is, dragged down into a double-dip by the coronavirus -- its resurgence (third time unlucky), its variants and the slow pace of vaccinations.

Preliminary estimates released by Eurostat show the single-currency region's GDP contracted by 0.6% in the three months to March 2021. This followed the December 2020 quarter's 0.7% contraction - satisfying the technical definition of a recession (two consecutive quarters of negative growth). The Eurozone registered its first pandemic-induced recession last year when GDP dropped in the first (-3.8%) and second (-11.6%) quarters of 2020.

But this had been largely expected and more importantly, all in the past. The future looks brighter.

Renewed social restrictions and lockdowns appear to have succeeded in bringing the number of daily coronavirus infections down, allowing easing of containment measures that is, in turn, reviving economic activity in the region.

This is evidenced by IHS Markit's most recent PMI surveys. The IHS Markit flash Eurozone Composite PMI increased to a nine-month high reading of 53.7 in April (from 53.2 in March). The region's manufacturing PMI rose to a record high of 63.3 while the services PMI went up to a reading of 50.3 - the first reading indicating expansion and the highest in eight months.

This is good news according to Chris Williamson, chief business economist at IHSMarkit: "In a month during which virus containment measures were tightened in the face of further waves of infections, the eurozone economy showed encouraging strength. Although the service sector continued to be hard hit by lockdown measures, it has returned to growth as companies adjust to life with the virus and prepare for better times ahead."

Even better, Factset reports that "with the Q1 reporting season well underway, analyst expectations of Q1 profits have jumped considerably higher vs earlier expectations. Refinitiv IBES data showed EPS from STOXX 600 companies in Q1 are expected to surge 71.3% from a year earlier, which would mark the best quarter for European stocks since IBES records began nine years ago" and that, "European bank Q1s show fading concerns about pandemic driven meltdown".

This optimism is made manifest by a Bloomberg report (citing SocGen) that, European companies intend to purchase around €150 billion of their own shares next year - a "25% jump from the average of €120B in the five years pre pandemic".

And why shouldn't they be?

There's money from the European Commission (EC). It has approved the "NextGenerationEU" package - worth €750 million - "to help repair the economic and social damage caused by the coronavirus pandemic" which, together with the European Union's (EU) long-term budget, "will be the largest stimulus package ever financed in Europe," totalling €1.8 trillion.

There's money from the European Central Bank (ECB). At its April monetary policy deliberations, it gave its assurance, if required, "to maintain favourable financing conditions to help counter the negative pandemic shock".

Read our full COVID-19 news coverage and analysis here.