Europe’s Economy Falls Further Behind U.S. and China. ‘It’s Getting Desperate.’

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Europe’s Economy Falls Further Behind U.S. and China. ‘It’s Getting Desperate.’

The eurozone’s economy is diverging sharply from the U.S. and China, as stubbornly high coronavirus infections, extensive Covid-19 restrictions and a painfully slow vaccine rollout delay Europe’s recovery from last year’s historic economic downturn.

Fresh data Tuesday highlighted an economic gap between the eurozone and the U.S. and China that is likely to widen this year, given that the U.S. is proceeding more quickly than the European Union in rolling out vaccines and China remains largely free of the virus.

The eurozone’s gross domestic product contracted by 0.7% in the three months through December from the previous quarter, resulting in an annual decline of 6.8% for the bloc in 2020, the EU’s statistics agency said on Tuesday. That compares with a 3.5% decline for the U.S. economy last year, supported by a strong rebound in the fourth quarter. China’s economy grew by around 2.3% last year.

Since the start of the pandemic, European policy makers have sought to balance saving lives and supporting businesses, but have generally pursued more draconian restrictions to stop the virus’s spread than has the U.S. Nonetheless, the death toll in Europe is approaching that of U.S., while its economic performance—already lagging behind the U.S. before the pandemic—has been much worse than other advanced economies.

Now, a sluggish rollout of vaccines, the threat of highly contagious new variants of the virus and the possibility of weeks or months of continued restrictions bode ill for the near term and could delay a recovery. EU countries have administered vaccines to less than 3% of their populations compared with 9% in the U.S. and 14% in the U.K., according to OurWorldInData.

Many economists expect the eurozone to re-enter recession in the coming months. “The eurozone will be the last major economy to return to pre-pandemic levels and will suffer continued substantial output gaps for at least the next two years,” said Erik Nielsen, chief economist at UniCredit.

The International Monetary Fund expects the eurozone economy to end this year 3.3 percentage points smaller than it was at the start of 2020, while the U.S. economy will be 1.5% larger.

At the current pace, the U.K. should have administered at least one dose of vaccine to 60% of its population by June, and the U.S. could follow by October, according to Berenberg Bank. France and Spain won’t reach that threshold until summer 2022, and Germany and Italy will take until 2023, the bank said.

At Lindner Hotels AG, a German family-owned company, up to 90% of staff have been on furlough since November, with some furloughed for the past 10 months, said Chief Executive Otto Lindner. The company’s revenue declined by roughly two-thirds last year.

“The second lockdown is much more brutal than the first. It’s getting desperate,” Mr. Lindner said.

Ryanair Holdings PLC, Europe’s biggest carrier, Monday downgraded its total passenger forecast for its fiscal year ending in March by as much as 9 million. It now expects only to fly between 26 million and 30 million customers. For fiscal 2022, the airline is forecasting a range of 80 million to 120 million passengers, about 70 million fewer passengers than its pre-pandemic assumptions.

“It’ll be a slower ramp up than we had possibly hoped, but I do think it will jump quite significantly once the vaccines are rolled out to a critical mass,” said Chief Financial Officer Neil Sorahan.

Europe’s uncertain outlook contrasts with a brighter picture in the U.S., where restrictions, such as shop closures in France, have been less stringent.

Photo: ian langsdon/EPA/Shutterstock

In Italy, Massimo Carboniero has a reasonably full order book for his company making industrial presses, but worries that if the coronavirus crisis drags on he will have trouble generating new business to offset what he lost during the pandemic.

“We are getting orders from clients that we already have, but it’s hard to get new ones when nobody can travel and there are no trade fairs,” said Mr. Carboniero.

Roberto Sciacchitano, who works near Milan for a company making parts for the aerospace industry and other sectors, spent two months furloughed last year when his factory closed as a result of Italy’s lockdown. While he is back working, he worries he will be furloughed again before the pandemic is fully under control.

“We are at the mercy of what happens outside of the factory,” says Mr. Sciacchitano.

Once Europe finally emerges from lockdowns, many businesses are likely to be in a precarious financial position, economists say.

Michael Kaefer says revenue collapsed around 80% last year at his family-owned catering business, Feinkost Kaefer. Looking for new businesses, he has recently signed contracts to open high-end food stores and to provide catering services for the airline business, which he expects will come back, but maybe not strongly.

“We will have an economic crisis after [the virus is] gone. There will be less money in companies and in private business,” Mr. Kaefer said.

There are bright spots. Eurozone exports to Asia have held up. BMW AG and Daimler AG recorded sharp increases in China sales last year, up 7% and 12% respectively, making up for double-digit declines in the U.S. and Europe.

Europe’s large manufacturing sector is holding up better this time. Eurozone factory output expanded for a seventh straight month in January, driven by Germany, albeit at a slower pace than in previous months, according to a recent survey by IHS Markit Ltd.

In Europe, sweeping job-retention schemes helped prevent large-scale unemployment in the short term. Close to a third of Europe’s workforce, or 45 million jobs in the five largest economies alone, benefited from national employment support schemes last year, according to data from Allianz SE. Millions of workers are still tapping the schemes amid a new wave of lockdowns.

Europe’s uncertain outlook contrasts with a brighter picture in the U.S., where restrictions have been less stringent, and a large new fiscal stimulus and huge savings could unleash a wave of spending once vaccinations are widely deployed. In the U.S., output growth accelerated in January toward a six-year high, according to business surveys.

Ande Pietoso, co-owner of Café Napoli and two other restaurants and a bar in the St. Louis, Mo., area, said shutdowns and restrictions on in-person dining capacity had cut into revenue during the spring and the holiday season. But the restrictions didn’t affect all of his restaurants, and he could continue curbside trading.

He has installed plexiglass dividers and set up igloos and heaters for outside dining. “We’re being forced to spend more money and not able to make more money to break even,” said Mr. Pietoso.

But he is “definitely more optimistic” about 2021 because of the rollout of the vaccine, and pent-up demand. “I think that people are dying to get out again” to visit bars and restaurants, he said.

Ugis Sprudzs of Oak Park, Ill., lost his job in the financial and data analysis field when his company restructured in late December, and has since applied for unemployment.

“On the economic front, I think things will improve because vaccinations will take place,” which should spur revived consumer spending and activity in 2021, Mr. Sprudzs said. He canceled a planned trip to Florida over the holidays due to Covid-19 concerns, but said he plans to travel to Europe as soon as international travel becomes feasible.

When the coronavirus tore through industry, commerce and society in March 2020, the U.S. economy came to a screeching halt. Top executives relive the tough decisions they made as they scrambled to weather the storm. Photo Illustration: Adele Morgan/The Wall Street Journal

Write to Tom Fairless at tom.fairless@wsj.com, Eric Sylvers at eric.sylvers@wsj.com and Harriet Torry at harriet.torry@wsj.com

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