Finland’s economy was showing signs of weakness even before the Covid-19 pandemic started – indeed, GDP contracted a bit in the fourth quarter of 2019. In spite of that, the economy has been one of the most resilient in Europe. That is notably because the pandemic has been relatively contained, allowing the authorities to impose softer restriction measures. Another reason is the substantial support provided by the government.
Despite managing well the epidemic, Portugal has experienced a severe economic shock in Q2. Real GDP plunged by 13.9%, pulled down by sharp falls in goods and services exports (-36.1% q/q) and private sector consumption (-14.0% q/q). Investment dropped (8.9% q/q). The country has been heavily impacted by the collapse in tourism inflows and foreign activity, particularly in Spain. External factors could also hamper the recovery, particularly given the surge in new Covid-19 cases in Spain. Nevertheless, the improvement in public finances operated in recent years should translate into a government deficit for 2020 smaller than in other European countries – around 7.0% of GDP according to government estimates. This provides relatively more leeway to support the recovery.
While UK GDP has bounced back since May and has made up half of lost ground caused by the Covid-19 pandemic, the economic crisis is still far from being over. In particular, concerns are mounting over the labour market, as the government’s furlough scheme will be terminated in the next few weeks. Meanwhile, the end of the transition period that maintains the UK in the EU single market and customs union is coming up fast. Disagreements during the negotiations raise fears about the UK leaving without a trade agreement, which could have an even bigger impact on the economy in the long term than the current crisis.
The Covid-19 pandemic has led to the most severe recession in Germany’s post-war history. The sudden drop in revenues in combination with only partly adjustable costs has led to a fast depletion of firms’ cash buffers. Business felt compelled to reduce inventories, cancel orders and defer investment projects. This had the effect of deepening the recession. It might be tempting to think that investment could quickly regain traction again, as it did following the Great Recession in 2008-09. This sounds too optimistic. European Investment Bank (EIB) researchers estimate that the European corporate sector could have lost revenue between 13% and 24% of GDP because of the Covid-19 pandemic[1]
Compared with three months earlier, the blue area of the chart – representing data for the last three months – is spreading out like an oil stain. Nevertheless, most indicators remain well below their long-term average, i.e. the inner grey circle in the chart. In particular, indicators for households and services improved substantially, due to the lifting of the lockdown restrictions. Retail sales boomed in the period May-July following the reopening of shops and the temporary reduction of the VAT rate in July [...]
CaixaBank and Bankia, respectively the third and fourth largest Spanish banking groups in terms of CET1, formalized on September 3, 2020, the opening of negotiations for a potential merger. If it materialized, this operation would consolidate the Spanish banking system. The level of concentration of the latter is comparable to that observed on average in the euro area, following two successive waves of consolidation between 2008-2009 and 2012-2013 from which CaixaBank and Bankia themselves emerged. The question is whether or not this could be the prelude to a broader movement of concentration that the ECB has been in favour of since several years. Indeed, the banking supervisor sees consolidation as a way to improve the financial profitability and resilience of banks1
The outcome of the ECB meeting was eagerly awaited considering the latest inflation data, the strengthening of the euro and the Federal Reserve’s new strategy of targeting average inflation. The implicit message from the ECB President’s press conference was “be patient” on the three areas of concern. Inflation is projected to pick up whilst staying well below the target, the euro exchange rate is being closely monitored and the sheer number of strategy review workstreams implies it will take quite some time before we learn about the outcome in terms of the inflation objective.
According to data from the Office for National Statistics (ONS), GDP in the United Kingdom dropped by more than 20% in the second quarter, which was the worst performance in Europe...
The economic recovery has been stronger in the industrial sector than in services, the former benefitting from a sharp rebound in consumer goods spending, particularly durables. Moreover, the impact of health measures on industrial activity is lower than for services...
This week’s Eurostat report confirmed that Spain has been Eurozone’s worst impacted country by the coronavirus. The resurgence of the epidemic and the implementation of new restrictions will hold back the economic recovery this semester, at least...
While Europe has been hit hard by the Covid-19 pandemic, Nordic countries have been relatively less affected – with the exception of Sweden, where restriction measures have been particularly soft. As a result, Nordic economies have been among the most resilient in Europe. In the second quarter, GDP fell by “only” 8.3% in Sweden, 6.9% in Denmark, 5.1% in Norway, and 4.5% in Finland. That compares with drops of 9.8% in Germany, 13.8% in France, and nearly 12% in the euro area as a whole. That said, businesses and consumers in Nordic countries are not especially optimistic about the economic outlook, which certainly reflects the region’s reliance on global trade
Signs of the French economic recovery since the lockdown was lifted on 11 May are starting to show in our Pulse barometer...
The latest flash PMIs had raised some concern given the weakening of the composite index for the eurozone (from 54.9 to 51.6) and Germany (from 55.3 to 53.7) and an even bigger decline in France (from 57.3 to 51.7).
To cope with the collapse in their revenues during lockdown, French non-financial corporations (NFCs) raised record funding flows. These totalled close to EUR 208 billion year-on-year net of repayments at end-June 2020, or 2.5 times the annual average recorded between 2017 and 2019 (EUR 83 billion). The growth in funding flows stemmed chiefly from bank loans (EUR 118.5 billion at 30 June, including some EUR 106 billion in PGE state-guaranteed loans since 25 March 2020) and also from net issues of debt securities (EUR 89 billion). NFCs’ deposits posted a matching increase (EUR 173.4 billion), and so the annual increase in debt net of deposits remained within the range seen since 2012
In Germany, business conditions during the past three months were in general worse than in the preceding three-month period (area within the dashed line). That is most obvious in the production-related hard data, which cover the lockdown period March-May...
Through the Recovery and Resilience Facility, an essential part of its Next Generation EU plan, the European Union (EU) will disburse grants and loans to member states according to precise criteria. Allocations for 2021 and 2022 will depend on each country’s population, GDP per capita, and unemployment rate. The same criteria will be used for 2023, except for the unemployment rate, which will be replaced by the loss in real GDP observed this year and the cumulative loss observed over the period 2020-2021. With that in mind, the think tank Bruegel has estimated the allocations by country[1]
The analysis of banks' business model responds to strategic as well as regulatory needs. It can also contribute to studying the effects of monetary policy, amongst other things. However, no harmonized definition exists in the literature. The authors therefore regularly use hierarchical cluster analysis to objectively classify banks according to their business model. These empirical, algorithm-based approaches rely heavily on balance sheet variables. Still, the distribution of bank sources of income and assets under management are also relevant variables. We therefore perform our own classification of European banks according to their business model using all these variables
The Eurozone Purchasing Managers’ indices (PMI) for July were better than expected. This is visible at country level, as the PMIs for France and Germany rose strongly. This improvement is noticeable in the eurozone services sector, which rose to a two-year high (55.1). The manufacturing PMI climbs above the expansionary line for the first time since January 2019. These positive numbers have to be taken with caution. Difficulties on the supply side appear to recede, but problems on the demand side are likely to persist. Consumer behaviour will be a key element for a stronger economic recovery
The European Council agreement this week on a recovery effort is, inevitably, a compromise but it is nevertheless historical It consists of a combination of grants and loans to member states and is funded by debt issued at the EU-level It sets a precedent for the management of future crisis situations with a better balance between monetary and fiscal policy. The possibility of such a two-pronged approach, reduces economic tail risk, which should structurally support confidence of households, companies and investors. The targeted allocation of the grants to countries which are in greater need, is another historical achievement and should generate a larger multiplier effect.
The Q2 GDP figures – released next week – should confirm that Spain has been one of the European economies hit hardest by the health crisis...
The Polish economy has to smooth the impact of the Covid-19 pandemic, which hit not only through the decline in foreign demand but also through the lockdown’s impact on domestic consumption. Yet the country has enough policy leeway to do so, thanks notably to a reasonable level of public debt before the slowdown began. GDP is unlikely to return to pre-crisis levels before mid-2021, which is bound to curb investment. Thereafter, Poland is expected to return to its robust growth trajectory since its strengths remain intact (competitiveness, labour supply, low wage costs and productivity gains), which have transformed the country into the European Union’s 5th biggest industrial sector.
Slovenia’s economy is in a relatively favourable position to face the Covid-19 crisis. The past three years were marked by robust growth, fiscal surpluses and the gradual clean-up of bank balance sheets. Yet as a small, open economy closely tied to the European Union, Slovenia could be significantly impacted by the crisis. European fiscal and monetary support as well as healthy public finances should soften the impact of the crisis on public finances and growth prospects.
The BoE and UK government have responded to the Covid-19 crisis with a broad range of measures. These were announced swiftly, but some have taken quite a while to implement, particularly when it comes to financial support for private sector companies. These measures share the feature of relying heavily on the country’s banking sector, which is in solid shape despite facing the same challenges as banks in other European countries. All this is taking place against the background of Brexit and the government’s refusal to extend the transition period on the basis that this would increase uncertainty for businesses and could reduce the flexibility they will need to react to the health crisis.
The bank lending pulse picked up slightly in the Eurozone in May 2020 (+1.9%, after +1.5% in April and +1.7% in March) even as Eurozone GDP is expected to have entered a record-breaking decline in Q2 (-13.5% q/q vs. -3.6% q/q in Q1 2020), as national lockdown measures have a lasting impact on economic activity. Bank lending to the private sector has accelerated rapidly since March (+5.3% in May, after +4.9% in April and +5% in March) after holding at a dynamic but relatively stable annual pace since summer 2018 (+3.5% on average). Lending to non-financial companies continued to grow at a rapid pace in May (+7.4% after +5.5% in March), offsetting the slowdown in household lending (+3%, after +3.4%)
Italian economic activity started to recover in May, in line with the easing in lockdown restrictions. Our barometer should therefore steadily improved over the summer, although it remains downbeat. Real retail sales rose 25.4% m/m in May, but the 3-month moving average continued to decline, hitting a new all-time low. Industrial production followed a similar trend. The improvement in the survey data was also mixed in June. The composite purchasing managers index (PMI) rose strongly (+13.7 points), but it remains in contraction territory. The European Commission’s economic sentiment indicator (for Italy) continues to hover near the lows reported during the 2008-09 financial crisis...
