Europe’s top three economies are now in recession. The real shock is still to come

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Germany’s economy shrank at the fastest pace since the global financial crisis in the first three months of the year, with GDP contracting by 2.2% compared to the previous quarter.

The country’s statistics agency said that household consumption fell sharply. Investment in machinery and equipment plummeted, while both imports and exports “saw a strong decline” compared to the fourth quarter.

WOLFSBURG, GERMANY - MARCH 31: The Volkswagen factory stands following a temporary halt to car production there on March 31, 2020 in Wolfsburg, Germany. Volkswagen extended the shutdown of factories in Germany until April 19 amid COVID-19 coronavirus outbreak (Photo by Maja Hitij/Getty Images)

Related article The world's biggest car factory just reopened. Here's what Volkswagen had to do

The big picture: The contraction in the first quarter was the second largest since German reunification in 1990.

Revised GDP data showed the country’s economy shrank slightly in the final three months of last year, meaning the largest economy in the eurozone is now officially in recession.

Germany joins France and Italy in recession but still ended the first quarter in better shape than the eurozone’s 2nd and 3rd biggest economies. First quarter GDP declined by 5.8% in France, and by 4.7% in Italy.

The difference? Germany did not introduce strict social distancing measures until the relatively late date of March 22.

Still, the worst is yet to come. Jack Allen-Reynolds of Capital Economics said he expects German GDP to decline by 10% in the second quarter.

“The lockdown is being eased in May and June, but only gradually, and Germany’s recovery will be constrained by the problems elsewhere in Europe,” he said.

Reopening factories won’t fix the economy

Production at China’s factories is growing for the first time since the coronavirus pandemic began, my colleague Laura He reports. That’s good news, but it doesn’t mean the world’s second largest economy will return to full strength anytime soon.

Remember: China’s economy shrank 6.8% in the first quarter compared to a year earlier.

While the International Monetary Fund still expects China’s GDP to grow 1.2% this year, analysts warn that the country’s recovery will be drawn out.

The challenge: It’s relatively easy for Beijing to get its state-backed manufacturing and construction companies into the game. What’s proving more difficult is encouraging consumers to spend.

Retail sales in China dropped 7.5% in April from a year earlier, according to data released Friday, suggesting that household finances remain strained. And unemployment rose again, after easing back a bit in March.

Here’s the assessment from economists at Societe Generale:

“Investment did better than consumption, and within investment, property and infrastructure outperformed on the back of credit stimulus. The disappointment in retail sales may continue, as the unemployment situation and income outlook remain challenging,” they wrote in a research note.

What it means for everyone else: China’s economic recovery has already been underway for months. Even Wuhan, the epicenter of the pandemic, emerged from lockdown on April 8.

That means countries that are still struggling to contain the coronavirus have months and months to go before their economies can really begin to recover. Some could even face a lost year.

The United States faces one of the bleakest outlooks.

More than 36 million Americans have filed initial unemployment claims since the middle of March, putting many households under huge financial strain.

And the coronavirus continues to spread, with the total number of cases in the country topping 1.4 million. Many consumers aren’t willing to leave their homes to visit restaurants and shopping malls, even if lockdowns have been eased in their state.

How bad is it? Investors will get a sense when retail sales for April are published at 8:30 a.m. ET.

Another data point: JCPenney is widely expected to file for bankruptcy in the near future. The iconic chain would join two other major US retailers, Neiman Marcus and J.Crew, as victims of the pandemic.

The poorest Americans are suffering most

The Federal Reserve on Thursday reported just how unequally the coronavirus-induced economic downturn is hitting Americans.

On one hand, lower-income people are getting slammed. Nearly 40% of those with a household income below $40,000 reported a job loss in March, according to the central bank.

At the same time, incomes and the ability to pay current bills appeared to remain generally stable for the majority of adults during the initial weeks of the coronavirus pandemic.

Also essentially unchanged was the percentage of people who reported they could pay off an unexpected $400 emergency expense entirely using cash, savings, or a credit card at the next statement.

More from CNN’s Tami Luhby: The findings back up other reports that show that lower-income Americans, as well as black and Hispanic people, are bearing the brunt of the outbreak’s financial fallout.

Up next

US retail sales data for April be published at 8:30 a.m. ET. JD.com earnings will be posted before the opening bell.

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