2020 closed with a quarter-on-quarter (q/q) fall in GDP of 1.3%, according to the first estimate of the Q4 national accounts published on Friday 29 January. This was a much smaller fall than expected (we had estimated -4% q/q, in line with INSEE and Banque de France estimates). The full year contraction in GDP was 8.3%. This good surprise came mainly from business and households’ investment and exports, which rose instead of falling as expected.
Italy is one of the rare European countries whose propagation of the epidemic is still under control at the end of January, although the situation is still very delicate. On top of these health uncertainties, political risk is also on the rise again.
Spain’s health situation is still alarming. The pandemic continues to spread, forcing the public authorities to tighten restrictive measures, notably in the Madrid and Valencia regions. Yet the most recent confidence indicators have shown a certain resilience in January, notably the European Commission economic sentiment index.
INSEE’s composite business climate index improved slightly in January, gaining 1 point to 92, whilst Markit’s Composite PMI saw a marked 3-point drop, to 47. These two surveys often move in opposite directions in the same month. Which should we believe this time around? We favour the INSEE index. In general terms it gives the more reliable signals. And in current circumstances its relatively positive message – given a still worrying health situation – also looks likely to be more accurate. In particular, it is in line with the stability of the Google Residential Mobility indicator for January compared to December (monthly averages). This indicator is one of the new arrivals helping with closer monitoring, in real time, of the impact of the Covid-19 crisis on economic activity
In the past, bank lending to companies and GDP have tended to move in unison, but with the Covid-19 crisis, these movements have become uncoupled in the eurozone. At a time when GDP growth has been contracting on a year-on-year basis – with a sharp contraction in Q2 2020 due to lockdown measures followed by an easing trend in Q3 after restrictions were lifted and a quarterly rebound – bank lending to the private sector has accelerated rapidly (+6.9% year-on-year in November 2020), buoyed by government measures to support corporate financing, like PGE state-backed loans in France, and the banks’ strong implication in lending.
In Europe, the Covid-19 crisis is far from over. Since the beginning of 2021, many EU member states have had to introduce new restrictions to try to curb the pandemic. Germany, Ireland and Portugal, for example, are still in lockdown, while several other countries, like France, Italy and Spain, have implemented curfews. Restrictions have been reintroduced just as vaccination campaigns are beginning to be rolled out in Europe and around the globe. Although vaccinations are our biggest source of hope, it will probably take considerable time to reach herd immunity...
Strong fiscal support is currently key to limit the impact of the coronavirus shock on growth and employment. But in the long term, the question of public finances control will be asked. In its November forecast, the European Commission predicts that Spain’s structural public deficit will widen to 7.2% of GDP in 2022. This would be the biggest deficit since 2010 – 2009 being a record high – and the largest within the Eurozone. Spain will not stabilise its primary structural deficit, which could surpass 5% of GDP by 2022. Nevertheless, the impact on public expenditures will be softened by low sovereign rates
The second wave of Covid-19 that swept Poland in Q4 2020 was more severe than the first wave in Q2 2020. In contrast, economic growth was not hit nearly as hard thanks to the resilience of industrial output and demand (exports and household consumption). The authorities’ stimulus measures combined with industry’s competitiveness – which was not undermined much by the pandemic – bolstered growth, and the trade surplus increased. Against the background, a somewhat weak zloty is more a choice than a by-product of deteriorated fundamentals. The European budget agreement, as Poland is one of the main beneficiaries of the Recovery Plan, should provide additional support for growth.
Economic growth experienced several short-lived boom-bust wild swings in 2020, amplified by trade openness and the severity of the second wave of Covid-19 in the fall. However, the recovery in the 3rd quarter proved strong. Industrial production and exports both performed well, boosted by a stable exchange rate (and substantial foreign currency reserves). In addition, thanks to very modest debt levels, the government was able to offer rapid and substantial support to the economy.
In force since 30 October 2019, tiering seeks to limit the cost of negative interest rates (-0.5%) for eurozone banks by excluding part of excess reserves from the charge[1]. This approach saved eurozone banks a charge of EUR 4.3 billion in December 2020, leaving a residual charge of EUR 9.8 billion. The cost of negative interest rates has nevertheless grown steadily since April 2020, and particularly in the second quarter of 2020, due to sharp increases in excess reserves. These increases result in part from the expansion of outstanding Targeted Longer-Term Refinancing Operations (TLTRO III), the terms of which were temporarily relaxed (from June 2020 to June 2021) in response to the Covid-19 pandemic
The United Kingdom has since 1 January fully exited the European Union, and a free-trade agreement has been found, as has been customary with Brexit, at the last minute. While that is good news for the British and European economies, Brexit is still “hard” and will surely trigger substantial economic losses in the long term.
The resurgence of the Covid-19 pandemic halted the Eurozone’s economic recovery. It looks like year-end 2020 will be harder than expected due to new social distancing measures and lockdown restrictions set up in most of the member states. Industrial output remains low compared to pre-crisis levels and companies in the tradeable services sector continue to be at the forefront of restrictions. As to the first half of 2021, uncertainty is still high. Faced with this environment, the European Central Bank (ECB) is expected to announce new monetary stimulus measures following its 10 December meeting as fiscal support measures are gradually reduced.
The second lockdown interrupted an already stalling recovery. However, the business climate is likely to improve soon on the expectation that several vaccines might soon be available. Inflation is currently in negative territory because of the VAT cut, but will soon turn positive again once the measure expires on 1 January 2021. Because of the second lockdown, the 2021 budget will show a larger deficit than assumed in September, EUR180 bn or 5.2% of GDP. In Q2, the household savings rate rose to 20.1%, a new historical high. Once the pandemic is over, the savings rate could drop considerably if consumers catch up on postponed purchases.
The huge recessionary shock in H1 was followed by an equally spectacular rebound of economic activity in Q3, with an 18.7% jump in real GDP, although it will remain short-lived. The recovery has turned out to be W-shaped: GDP is expected to fall again in Q4 because of lockdown measures reintroduced on 30 October to tackle the second wave of the covid-19 pandemic. However, the second V should be less pronounced than the first: the decline should be smaller because the lockdown measures are less stringent, and the rebound should also be smaller because restrictions will remain in place and the economy is weakened. There is still a long way to go, but the arrival of vaccines means that there is light at the end of the tunnel
Following an impressive decline in the first half of 2020, the Italian economy rebounded over the summer. Value added rose strongly in construction and manufacturing, while the recovery in the services sector was less substantial. Favourable indications also come from house prices invalidating the darkest scenario depicted at the beginning of the pandemic. To contain the second wave of infections, the Italian Government has taken restrictive measures, with negative effects on activity. The economy is expected to decline in Q4 again. This contraction should be less significant than in the first half of the year, with only a moderate impact on 2020 growth, while the carry- over in 2021 should be more sizeable.
Forecasts made at the start of the year will probably turn out to be accurate. Spain is set to be the Eurozone’s economy hardest hit by the Covid-19 epidemic. We forecast GDP to shrink by 11.8% in 2020 before rebounding by 7.0% in 2021. The social situation has worsened again this year, forcing the government to introduce new large-scale welfare benefits (e.g. minimum living income), which will be reinforced in 2021. Spain’s huge €140 billion stimulus plan will support the recovery, should raise the country’s potential growth and create jobs. But the structural budget deficit is widening
We expect the Belgian economy to lose 7.2% of its size this year, followed by a 3.8% increase next year. After a strong recovery in the third quarter, private consumption is expected to decline again at the end of this year, but not as much as during the first lockdown. So far, structural damages seem to have been mainly avoided, with bankruptcies close to their normal level and unemployment rates stable since the beginning of the year. Government support measures have no doubt played a crucial role in this but once these measures are discontinued, some long term scarring will take place.
The government decreed a second lockdown in November due to the rapid rise in Covid-19 infections. Business indicators point to a fall in activity. Thanks to the short-time work scheme, unemployment has only risen moderately. Moreover, inflation has remained at a relative high level compared to other eurozone countries. In 2021, fiscal policy remains very accommodative and the deficit might only shrink to 6.3% of GDP. The economy is projected to rebound by 3.5% in 2021 compared with a slump in 2020 (-7.5%). A major downside risk is the increased indebtedness of the non-financial corporate sector.
In Q2 2020, Finland stood out from the rest of Europe as the country that reported the smallest decline in GDP – “only” –4.4%. Yet the ensuing recovery was less vigorous than for its EU neighbours, and Finland will surely continue to underperform in the months ahead. Even so, the Finnish economy is still one of the most resilient in Europe, thanks notably to the relatively feeble spread of the virus and robust support from the fiscal and monetary authorities.
Greece’s economic recovery will be fraught with uncertainty in 2021. The Covid-19 hit to activity could last longer in the tourism industry – a key sector for the country – than in other sectors. The decline in tourist inflows in summer 2020 has limited significantly the rebound in Q3 GDP, which was much weaker than in other European countries. Some confidence indicators, particularly regarding the unemployment outlook, have worsened during the autumn. The conservative government plans to use the large amounts of money allocated by the European recovery fund to finance its stimulus plan, details of which will be finalised early next year. Despite that, public debt is likely to remain above 200% of GDP by the end of 2021, which is very worrying from a long-run perspective.
The record fall in UK GDP in the second quarter gave way to unprecedented growth in the third, and the news that an effective vaccine against Covid-19 will soon be widely available suggests that the economy could start its definitive recovery in 2021. However, the UK is not out of the woods yet. Given that a second national lockdown was introduced in England in November, there is little doubt that economic activity will drop again in the fourth quarter. Moreover, the strength of the recovery is, because of Brexit, more uncertain than elsewhere. This not only because of the UK’s decision to leave the EU’s single market and customs union, but also due to continued uncertainty over whether a free-trade agreement will be found.
Since March 2020, Sweden has adopted a more relaxed approach to the COVID19 outbreak as no lockdown has been imposed to the population. However, the recent pick up in new infections could slow the recovery down in Q4 2020. Pervasive uncertainty will continue to hamper exports and corporate investment, while household consumption is fuelling the economic recovery. In 2021, the Riksbank will maintain and expand its vast asset purchasing programme. New expansionist measures are expected to bolster an already accommodating fiscal policy.
The Danish economy has quickly rebounded after the reopening of the borders but a complete catch-up will take time since the resurgence of the Coronavirus epidemic keeps the country’s economic situation uncertain. Services exports were hard hit by the crisis in 2020, but are offset by a surge in Danish household consumption, supported by government measures. Fiscal policy should remain accommodative in 2021 and the Central Bank of Denmark will continue to defend its peg with the euro.
The latest Google Mobility Report - published on 6 December – shows that customer traffic flows to retail and leisure businesses in Europe early this month continued to build on the momentum reported end November. This momentum is the result of the easing of containment measures in Europe...
Due to the lengthening of the health crisis, the European Banking Authority decided on 2 December 2020 to reactivate its guidelines on legislative and non-legislative moratoria on loan repayments. This decision aims at easing credit instructions criteria for granting moratoria. Moratoria granted in relation to the COVID-19 pandemic before 31 March 2021 will not automatically be considered as a forbearance measure. However, such moratoria must have benefitted a sufficiently large set of borrowers and their granting must have been based on a criterion other than solvency. The beneficiaries of moratoria that aim at preventing a default will no longer automatically be considered in default
