Germany faces winter of stagnation as Covid surge savages eurozone economy

Europe’s recovery is under threat from surging Covid cases and energy prices as its biggest economy faces a winter of stagnation, experts have warned.

The intensification of the crisis came amid a fresh collapse in business confidence in Germany and record case numbers across a host of European countries, heightening fears over the return of crippling lockdowns.

Andrew Kenningham at Capital Economics said the German economy was set to grind to a halt this quarter, while stagnation for the wider eurozone was possible if Berlin was forced to reimpose tight restrictions.

Germany’s new coalition government led by Social Democrat chancellor Olaf Scholz unveiled its new agreement on Wednesday following September’s elections but was immediately faced with a record 66,884 cases as the death toll passed 100,000.

France, meanwhile, faced the shock of energy prices at their highest for almost a decade due to lower generation from its nuclear power stations, intensifying a cost of living squeeze that has pushed eurozone inflation to its highest level since 2008. 

France is expected to toughen Covid measures on Thursday including increased mask wearing and tighter restrictions on the unvaccinated. 

A fourth wave

Figures on Friday are likely to underline the impact of the crisis on French consumers following fresh signs of a confidence collapse among German businesses. 

The closely watched Ifo survey of 9,000 firms showed German business confidence fell to a seven-month low as fears over the fourth wave of the virus gathered terrifying momentum and companies faced post-pandemic supply shortages.

“Supply bottlenecks and the fourth wave of the coronavirus are challenging German companies," the institute said.

Mr Kenningham said there was a growing risk of stagnation in Germany, which alone accounts for around a third of the Eurozone’s economic output. 

Stagnation in Europe “is possible but it would require really quite tight restrictions in Germany to push it into contraction”, he said. “If in the next week the case numbers do really increase quickly, we could see some restrictions.”

Salomon Feidler, an economist at Berenberg, said Germany’s supply chain woes would “remain serious during the Christmas season before they get better”.

He warned: “Germany also faces higher Covid infection rates which will probably hamper growth in the near term due to renewed restrictions, so far mostly on the unvaccinated minority, and because even vaccinated people are more hesitant to go out and spend.”

The euro crashed to its lowest against the dollar for more than a year as investors took flight at the region’s growing economic woes following Austria’s return to a full lockdown this week.

Switzerland, which has suffered a 50pc rise in cases in the past week, called the situation critical and said it was likely to worsen in coming weeks.

The country, which has one of the lowest vaccination rates in Europe, is urging all those who can to work from home but has held off on imposing tighter restrictions.

In eastern Europe the Czech Republic, Slovakia and Hungary also reported record case numbers.

Daan Struyven, an analyst at Goldman Sachs, said Europe was more exposed to the resurgence of the virus than the US.

“Any drag on growth will likely be larger in the euro area than in the US. This reflects in part a higher risk of significant outbreaks due to lower immunity, and somewhat colder weather. Moreover, a higher virus sensitivity of Covid restrictions and consumer spending also point to a larger drag in the euro area,” he said.

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