Coronavirus could kill fragile hopes of European recovery

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Economists agree that it is much too soon to assess the real consequences of the coronavirus shock on global growth. But it is already clear that it comes at the worst possible time for the European economy.

At the very least, the disruption that the spread of the virus may soon cause in industrial production and exports could fail to quickly lift Europe out of the slump it went through in the last quarter of 2019. Eurostat, the EU statistics institute, said on Wednesday that industrial production had declined by 2.1% in December in the eurozone, compared with the previous month, and by 4.1% over the same month of 2018. That is a big fall, driven by the dismal performance of the German car industry.

But after that gloomy year-end, optimism seemed to be slowly returning among manufacturers. The embryo of a trade deal with China, diminished protectionist threats emanating from Washington, and even the vague possibility that a post-Brexit trade deal might be concluded between the U.K. and the EU, all created hopes that some form of recovery would happen in the first half of 2020.

It can still happen. According to Deutsche Bank analysts, the coronavirus so far might cost China between 0.3% and 0.5% of growth, which would in turn impact the rest of the world, notably big exporters such as Germany. If the impact stays at that limited level, the European economy will be able to cope. The European Central Bank expects eurozone gross domestic product growth to slow down to 1.1% this year.

There is no reason, for now, to expect a major hit from the new risk created by the fast-spreading virus. But sentiment here may be more powerful than actual facts. Just after the trade war threats that slowed global trade last year seemed to be receding, more uncertainty, delaying yet again investment decisions, will weigh on the already-fragile European economy.

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