Deepest downturn since WW2

The euro-zone is experiencing an unprecedented collapse in economic activity. We suspect that GDP will be roughly 25% below its pre-crisis level during the lockdowns, with the scale of devastation varying between countries. Many sectors of the euro-zone economy have closed completely, and others are operating well below capacity. Activity has fallen furthest in Italy and Spain because the restrictions there have been the most draconian. While the pandemic itself may peak in the coming few weeks, some restrictions are likely to remain in place for months. For now, we still think that the risk of a sovereign debt crisis is low, thanks to the ECB’s scaled-up asset purchase programme. Further ahead, the astronomical cost of the crisis means that governments, businesses and households will all come out of the crisis with significantly impaired balance sheets.