The recovery in economic activity that began at the end of the spring continued through the summer, with China leading the way, and oil and metals prices have picked up. But doubts are emerging as the pace of the recovery seems to be slowing, as reflected by exports recent loss of momentum. Above all, there are currently worries regarding the persistence of the pandemic and the risk of lockdown extensions or even new lockdowns in several countries. There are, however, some factors of support: continued easing of monetary policies, market tolerance of rising budget deficits and a reduction in the debt of the most vulnerable countries by official lenders. However, the leverage of those factors should not be overstated.
The economy continues to recover. Initially driven by a rebound in industrial production and investment, the recovery broadened over the summer months. Exports have rebounded and activity has also picked up in the services sector. Yet it continues to be strained by the timid rebound in household consumption, which is far from returning to normal levels. The unemployment rate began to fall right again after the end of lockdown measures, but this decline has been accompanied by an increase in precarious jobs and large disparities, with the unskilled and young college graduates being particularly hard hit.
Once again, South Korea seems to be withstanding the crisis better than developed nations generally. The effective management of the health crisis and the government’s massive stimulus package paved the way to a shallower recession than in other countries in the first half of 2020. However, the new social distancing measures introduced at the end of August and the persistent weakness of exports will hold back growth over the coming months. In the short to medium term, macroeconomic fundamentals are likely to remain very solid: government deficit and debt levels remain modest, inflation is under control and external vulnerability is very low.
Between April and June 2020, India’s economy contracted by nearly 24% compared to the same period last year. This unprecedented contraction can be attributed to the collapse of domestic demand. Although the economy has rebounded since June, it is still fragile and well below pre-crisis levels, prior to the outbreak of the Covid-19 pandemic. The central bank and government did not have much support capacity, but even this has been eroded by higher prices and a drop-off in fiscal revenue. Public debt is expected to swell to nearly 89% of GDP, and will strain the country’s future development projects, especially given that government spending contributed to nearly 30% of growth last year.
For the first time since the 1998 crisis, Indonesia is expected to enter recession in 2020. In Q2 2020, the economy contracted by more than 5%, and the recovery should be slow. Domestic demand is struggling to pick up, and Jakarta has just been put under a partial lockdown again. Fiscal support has been slow in coming: planned fiscal spending still hasn’t materialised in the first seven months of the year. Even so, the deficit is under control and the central bank is acting as the lender of last resort. In H2 2020, the government hopes to consolidate the recovery via a massive support package for low-income households. Even though inflation is under tight control, the poverty rate could reach 11.6% according to the World Bank (vs 9.2% in 2019).
The epidemic remains in full swing, but has shown some signs of deceleration. The recovery in Q3 has been stronger than expected. However, the picture varies considerably from one sector to the next. The central bank has paused its monetary easing cycle for the first time since mid-2019. At the same time, it has adopted a more active communication stance through the embracement of forward guidance. The emergency aid programme – which will push the budget deficit to a record high – has meanwhile helped President Bolsonaro witness a resurgence in popularity. Negotiations over the 2021 budget are likely to crystallise tensions across the executive and Congress
The health crisis has slammed an economy that was already suffering from more than two years of recession. GDP will probably contract by more than 10% in 2020. With the technical rebound that began in late Q2 and the signing of a public debt restructuring agreement, the country should manage to pull out of recession in the second half. Yet financial instability persists with the erosion of foreign reserves, the stark disconnection between official and parallel exchange rates and expectations of surging inflation. The authorities have tightened forex controls again. IMF support is essential for financial stability but might not suffice for a sustainable recovery.
The Hungarian economy was hit particularly hard by the effects of the Covid-19 pandemic in the 2nd quarter of 2020, due to the weight of exports in its GDP. The shock seems to have been absorbed relatively well, with the government and central bank focusing on supporting the labour market and introducing the necessary moratoriums on interest payments and loan repayments. The stimulus measures introduced have been constrained in particular by the need to avoid an excessive depreciation of the forint. The reduction in government debt, interrupted this year, is likely to get back on track quickly, within the framework of an unchanged strategy: maintaining a moderate corporate tax in order to continue to attract foreign investment in the manufacturing sector.
Since late spring, Turkey has enjoyed a rapid, buoyant recovery. This is rather typical for an economy regularly hit by external shocks that are magnified by capital outflows. Turkey has managed to bounce back yet again thanks to strong economic policy support. The bad news is that it is accumulating several imbalances, including another significant current account deficit and a sharp increase in credit growth, which is accelerating faster than during previous recovery phases. These two factors, which put downside pressure on the lira while driving up inflation, signal a deterioration in the quality of growth and imply higher debt ratios.
The Egyptian economy has performed pretty well in the face of the pandemic. Activity has been bolstered by major public investment projects, whilst inflation has fallen well below the central bank’s target. The fiscal and current account deficits are likely to increase, but international support and access to capital markets at favourable conditions have contributed to a macroeconomic stabilisation. The continuation of a high policy rate at the central bank has helped keep the Egyptian market attractive to international investors. Thanks to injections of liquidity, lending remains strong, although this increases the exposure of banks to sovereign debt and credit risk in an increasingly uncertain environment.
Lebanese GDP could fall by a quarter in 2020 under the combined effect of the deep economic crisis that has taken place since 2019 and the Beirut port explosion. In the short term, hopes of a recovery are limited. The economic system that closely links the public finances, commercial banks and the central bank appears to be on its last legs. The system of multiple exchange rates will not prevent the exhaustion of foreign currency reserves in the near future. Meanwhile, the government, which is in default on its foreign currency debt, has been forced to monetize its fiscal deficit. Commercial banks have built up record exposure to sovereign debt and substantial external liabilities.
Despite rapid support measures, the economy will not escape a severe recession this year. With the abrupt halting of tourism activity, the drop-off in exports to Europe and the collapse of domestic demand in Q2, GDP will contract by about 6%. Although there are high hopes that a good agricultural harvest will fuel a rebound in 2021, the recovery of non-agricultural activities will take time. In contrast, Morocco’s macroeconomic stability does not seem to be threatened. But growing pressure on public finances leaves the authorities very little manoeuvring room.
With the country in recession for the fifth consecutive year (latest estimates put the contraction in 2020 at 4%), the current crisis is acting as a catalyst for existing weaknesses and further damaging the country’s economic prospects. The combined effect of lower oil prices and production and the depreciation of the currency has increased pressure on the capacity for external financing and the sustainability of Angola’s debt. The country has seen a significant decline in its currency reserves, which could become insufficient as the financing deficit increases. Currently under negotiation, the expected support of bilateral creditors (most notably China) is becoming crucial.
