A deep European recession is now ‘inevitable’ and it could hit the continent as hard as 2008 despite policy moves, UBS says

Traders work on the floor at the NYSE in New York

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Traders work on the floor at the NYSE in New York
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Reuters
  • UBS says that a deep recession in Europe is now its base case scenario despite heavy fiscal and monetary stimulus.
  • The continent’s economy could shrink by as much as 4.5% similar to the global financial crisis in 2008.
  • “A European recession appears inevitable – the question is how deep and long it will be,” said UBS economists in a research note.

Swiss Investment Bank UBS says that a deep recession in Europe is now its base case scenario despite heavy fiscal and monetary stimulus.

The Swiss bank said that the continent’s economy could shrink by as much as 4.5% similar to the global financial crisis in 2008 in a research note. In recent weeks, the European Central Bank (ECB) has pumped €750 billion ($820 billion) into the European economy in a bid to boost countries which have been adversely impacted by coronavirus.

“A European recession appears inevitable – the question is how deep and long it will be,” said UBS economists Reinhard Cluse, Felix Huefner, Anna Titareva, and Jennifer Aslin in a research note. Italy, which is in shutdown, and Germany would be the worst hit economies according to UBS’s projections.

The bank’s base case scenario suggests that: “the shutdown lasts until mid-May, followed by a recovery. But despite heavy stimulus from monetary and fiscal policy, negative secondary effects cannot be avoided, unemployment and bankruptcies will rise over the coming weeks, weighing on household consumption and fixed investment even after the shutdown is over.”

Economic damage will be dictated by the length of the shutdown in Europe, with estimates suggesting that the longer the continent is shutdown the deeper the likely recession will be. This would also impact on the strength of a potential bounce back.

On Monday, Bundesbank, the German central bank warned that a pronounced recession in Germany is unavoidable. Germany is one of the largest economy in Europe and a recession would mean a deep-rooted impact on the overall European economy.

“Sliding into a pronounced recession cannot be prevented. An economic recovery will only start when the pandemic risk is effectively contained,” Bundesbank said in its March monthly report.