Eurozone economy contracted less than expected in fourth quarter of 2020

Employment rate rose in final three months of last year despite Covid-19 restrictions

An almost deserted shopping centre in Dresden, eastern Germany. Eurozone GDP fell 0.6% in the final three months of 2020. AFP

The eurozone economy contracted less than expected during the fourth quarter of 2020 while employment edged higher despite tightened restrictions across the bloc, the European Union's statistics agency said on Tuesday.

Gross domestic product (GDP) fell 0.6 per cent in the final three months of last year from the previous quarter, versus an expected decline of 0.7 per cent, according to Eurostat, with an annual fall of 5 per cent.

“These declines follow a strong rebound in the third quarter of 2020 of 12.4 per cent in the euro area,” Eurostat said, reflecting a period when pandemic restrictions were eased.

Meanwhile, employment grew 0.3 per cent on the quarter in the last three months of 2020, after a 1 per cent quarterly rise in the previous three months, but the reading was still 2 per cent lower than in the same period a year earlier.

The rise in unemployment in the eurozone has been partly protected by government programmes that pay the wages of furloughed workers, with the currency area's unemployment rate remaining unchanged at 8.3 per cent in December.

"Overall, the hit to the labour market last year was nowhere near as bad as might have been expected, given how much the economy contracted," said Jessica Hinds, Europe economist at Capital Economics.

"This suggests that the more targeted measures in the autumn, combined with government job protection schemes, were successful in cushioning the blow to the labour market."

Like the rest of the world, the eurozone has been battered by the effects of the Covid crisis. In the second quarter of last year, it suffered one of the sharpest decreases in GDP since records started in 1995 with a contraction of 11.7 per cent.

While the EU has been criticised for its slow distribution of the vaccine, there are signs of hope with investor morale in Germany rising in February on expectations consumption will take off in the coming months, according to the Zew economic research institute on Tuesday.

The Zew said its survey of investors' economic sentiment showed a rise to 71.2 points from 61.8 the previous month for Europe’s largest economy.

"The financial market experts are optimistic about the future. They are confident that the German economy will be back on the growth track within the next six months," Zew president Achim Wambach said.

"Consumption and retail trade in particular are expected to recover significantly, accompanied by higher inflation expectations,"

The eurozone is likely to decide between March and May when and how governments would start tapering support to their economies as vaccination campaigns allow the lifting of pandemic lockdowns and economic activity picks up.

Last week, the European Commission cut the economic outlook for this year to 3.8 per cent from 4.2 per cent and said developments largely depend on the success of the bloc’s immunisation efforts. An increase in bankruptcies that would cause higher unemployment also remains a key risk, it said.