One of the longer-lasting consequences of this crisis is a forced increase in corporate gearing A high level of corporate leverage can act as a drag on growth. Research shows that firms with higher leverage invest less than others. This reduces the effectiveness of monetary accommodation. Highly indebted companies may also suffer a lasting loss in competitiveness vis-à-vis their better capitalised competitors. It implies that policies aimed at recapitalising companies should have lasting favourable effects on growth.
Industrial output and retail sales both plunged in April – by 19.1% and 10.5%, respectively on a month-on-month basis. Furthermore, the latest labour market figures show a misleadingly decline in the unemployment rate of 6.3% in April. Indeed, this was due to a record contraction in the labour force; employment also fell sharply...
The Covid-19 crisis will leave its mark on the economy. However, the decade ahead offers new prospects for growth and employment. Spain suffers from a lack of employment and investment in technology-related sectors, but has opportunities to close these gaps. The renewable energy sector can be a significant source of employment over the medium to long term.The National Energy and Climate Plan is a significant step forward (if passed and implemented). The European Green Pact and Brexit may also help boost high-tech investment in the country.
M3 monetary aggregate growth continued to accelerate in the Eurozone in April, to 8.4% year-on-year from 7.5% in March, the strongest annual growth rate since early 2009. Yet the monthly growth rate of the money supply aggregate eased in April to a seasonally-adjusted 1.2% m/m, well below March’s peak of 2.5% m/m, but still three times higher than the long-term trend of 0.4% m/m. Although credit to the private sector remains by far the largest counterpart of M3 money supply, credit to general government made the biggest contribution to the acceleration of money supply growth since early 2020, bolstered by the intensification of the Eurosystem’s government securities purchasing programme (a cumulative total of EUR 67 billion in March and April 2020)
The European Commission is proposing a comprehensive plan to support growth and achieve the EU ambitions in terms of climate policy and digital strategy. Such an effort is necessary in order to avoid that the current crisis would increase the economic divergence between member states. Such a development would weaken the functioning of the Single Market and weigh on long-term growth. The Commission proposes a combination of grants and loans at favourable terms, funded by debt issued directly by the EU. Given the resistance of certain countries to grants, negotiations on the proposal will be tough.
Without a doubt, the eurozone GDP will contract much more sharply in Q2 than in Q1 (-3.8% on a quarterly basis, q/q). Yet this deterioration generally seems to have been halted. After a timid upturn in the Purchasing Managers Index (PMI) in May, the eurozone Economic Sentiment Index (ESI) also seems to have bottomed out. After dropping to an all-time low of 64.9 in April 2020, the ESI picked up slightly to 67.5 in May [...]
Households’ confidence will be a key determinant in the current recovery. The deterioration – felt or anticipated – in the labour market has weighed on consumers’ optimism: the European Commission (EC) unemployment expectations index dropped to a 11-year low in April (63.0). However, the Purchasing Managers indices (PMI) indicate that the economic downturn has started to ease in May. This could filter through into a pick-up of households’ confidence. Indeed, the chart below shows that the EC unemployment expectations index follows closely the employment PMI indicator. The latter improved in May, although staying at a very low level. The gradual reopening of shops, restaurants, and some cultural sites could also support consumers’ confidence in the coming weeks.
Central Europe has registered a better growth performance in Q1 (-1% q/q), compared to -3.3% in the European Union. In Hungary, Romania and Bulgaria economic growth had even remained positive during this period. However, this Q1 growth performance is rather the consequence of a late impact of the Covid-19 than a byproduct of a lower impact. Manufacturing production figures show that the economic downturn has gathered pace in Central Europe in March. This downturn is now stronger in Hungary, Romania and Slovakia than in European Union’s average. Exports should be one of the main drivers of the contagion towards Central Europe
The shape of the post-crisis recovery will depend on the characteristics of each economy, the fiscal response and the level of integration in global value chains. Even before the COVID-19 crisis, some eurozone economies were more vulnerable than others. High levels of debt or unemployment could limit the strength of the recovery. At a domestic level, the sectoral structure, the pattern of private consumption and the labour market situation will be crucial. A high dependency on tourism, a sector durably impacted by the crisis, could hold back the recovery. At the external level, a slow recovery in global trade would hit the most open economies. Moreover, the distortions in global value chains during this crisis could weaken the most highly-integrated economies over a longer period.
The last Bank of England (BoE) Monetary Policy Committee of May 7, 2020 leaves UK monetary policy unchanged, including the target outstanding of its asset purchase program, despite the vote of two of the members of the Committee in favor of an increase of GBP 100 bn. Inaugurated in 2009 with an initial outstanding of GBP 200 bn, the program has been extended several times. The latest increase, decided on March 19, brought the target outstanding to GBP 645 billion (including 20 bn in investment-grade corporate bonds), against GBP 445 billion (including GBP 10 bn in investment-grade corporate bonds) previously
Following the judgment of the German Constitutional Court on 5 May, the ECB Governing Council needs to demonstrate that the monetary policy objectives of its PSPP are not disproportionate to the economic and fiscal policy effects resulting from the programme. In most cases, monetary, economic and fiscal policies are mutually reinforcing. When assessing whether monetary policy is appropriate, one should take into account the stance of economic and fiscal policy. The necessity to have adequate transmission to all jurisdictions as well as the likelihood and extent of tail risks due to insufficient policy action also play a role in the assessment.
The Spanish data has sharply deteriorated – well below their historical averages – since the beginning of the lockdown in March. The trend in exports and industrial output remains positive on the graphic below but the latest figures are only for February. They will also plunge in March/April [...]
The sharp rise in household inflation expectations is one of the striking results of the April 2020 INSEE consumer confidence survey. This increase goes the opposite way of the fall in the balance of opinion on price trends over the past 12 months as well as in actual inflation. This large divergence is noteworthy in view of the usual relative proximity of the three indicators. This rise in expected inflation echoes the French people’s feeling, conveyed in the media, that significant price increases have occurred since the lockdown. This is probably the consequence of the composition effect of consumption baskets and not the warning sign of a widespread and substantial pick-up in prices in the making
In the coming decades, the European countries will be confronted with rising costs related to population ageing. Based on very optimistic assumptions, simulations carried out by the EU’s Economic Policy Committee suggest that these costs are manageable. Persons that enter the workforce now are unlikely to retire under the same conditions as those who retire at the moment. The transition to leaner public pension schemes calls for accompanying measures such as incentives to remain longer in the labour force and inducements to better prepare retirement. In particular, the authorities could inform employees regularly about their pension rights and encourage them to increase their retirement savings.
Lending momentum in the euro zone recovered strongly in March 2020, with an increase of 1.6% from a 0.4% fall in February. Against a background of negative GDP growth in the first quarter (-3.3% Q/Q-4 from +1.0% Q/Q-4 the fourth quarter of 2019), conditions in March were severely affected by the lockdown measures introduced by national governments over the month [...]
The Covid-19 crisis will result in a sharp contraction of eurozone GDP. However, its effect on inflation is still unclear. The impact could be disinflationary over the short term, although no consensus has emerged as to the likely medium term trend. In March, total inflation in the eurozone fell significantly, also reflecting the effect of lower energy prices. The destruction of a portion of the productive capacity could constrain supply in the medium term, whilst public policies will support demand, thus encouraging an acceleration in prices. Conversely, a lack of demand relative to potential supply could maintain a disinflationary bias in the eurozone.
Clear progress has been made at the European Council meeting this week. The proposals of the recent Eurogroup meeting on the creation of three safety nets have been endorsed. There is agreement to work on a recovery fund intended for the most affected sectors and geographical areas in Europe. Its financing would be linked with the multiannual financial framework. Importantly, Chancellor Merkel has declared that, in the spirit of solidarity, one should be prepared to temporarily pay a higher contribution to the European budget.
Romania’s economy has become gradually unbalanced in recent years, ending 2019 with significant twin deficits, i.e. both a fiscal deficit and a current account deficit. An accommodative fiscal policy has stimulated growth and should continue to do so. Even so, Romania will not avoid a contagion effect due to the COVID-19 pandemic’s economic fallout. The country is bound to slip into recession even though growth has already dwindled. Though foreign currency liquidity is still sufficient, its relatively low level could constrain monetary policy: a stable exchange rate is key for an economy that still has a significant amount of euro-denominated debt, albeit much less than before.
The Eurogroup has reached an agreement on bringing EUR 500 bn -4.2% of eurozone GDP- of additional firepower to attenuate the immediate economic impact of the Covid-19 pandemic. Three tools will be used: the SURE programme to temporarily support national safety nets, the EIB guaranteeing lending to companies -in particular SMEs- and a Pandemic Crisis Support via the ESM. The work on the creation of a Recovery Fund to boost European investments will continue. The difficult part will be to agree on its funding.
The number of unemployed people leapt by 311,037 in March (seasonally-adjusted figures), the biggest monthly increase on record. However, the unemployment report only included a fraction of people in partial unemployment (data for April should show a much bigger jump). The latest Government accounts (2019) show a substantial narrowing of the primary deficit since 2013. The improvement in public finances gives the government some leeway to face the current crisis.
The Covid-19 pandemic has triggered a recession in the Eurozone that looks likely to be deep but short-lived. After a difficult year and a half on the economic front, the Eurozone was showing some resilience and was even beginning to show signs of stabilisation. The current shock – in demand, supply and uncertainty simultaneously – has completely changed the outlook. The health measures taken- which have been necessary to protect the population from the virus- have created the conditions for a recession. Monetary and fiscal policymakers have reacted swiftly and, so far, proportionately. However, the profile of the economic recovery remains unclear and will be crucial in assessing the damage ultimately caused by the pandemic.
The German economy has come to a standstill because of the almost complete lockdown. To fight the economic consequences, the government launched a massive stimulus plan to increase spending in the health sector, protect jobs and support businesses. Nevertheless, production losses may reach dimensions that are well beyond growth falls in previous recessions. In the worst scenario of a three-month lockdown, GDP growth could lose around 20 percentage points and 6 million people may have to join the short-time work scheme.
Clearly, 2020 will not be another year of slow but resilient growth as we were forecasting just last quarter. We must now expect a massive recessionary shock triggered by the Covid-19 pandemic. To date, the INSEE estimates the instantaneous loss of economic activity linked directly to confinement measures at 35%, which is equivalent to slashing off 3 points of annual GDP per month of confinement. In March, the business climate was in free fall, which gives us a first glimpse of its scope. A full arsenal of measures have been deployed to mitigate the shock as best possible. According to our estimates, French GDP could contract by 3.1% in 2020, more than the 2.8% decline reported in 2009, before rebounding by 5.4% in 2021. These forecasts are highly uncertain, with risks on the downside.
The outbreak of Covid-19 hit Italy while the economy was already contracting. The exceptional growth of infected people has brought the Italian Government to take harsh measures, that include stopping all economic activities, excluding those considered as necessary, and imposing a quarantine for the entire population. The combination of an induced supply and demand shocks is going to cause a recession, which is expected to be deep and to last at least until June. In 2020 as a whole, despite the strong support coming from fiscal and monetary policy, the Italian economy should decline by some percentage points.
Spain is Europe’s second hardest-hit country by the coronavirus pandemic, and is likely to suffer a sharp economic contraction this year. The economic impact remains hard to quantify. GDP is nonetheless likely to fall by more than 3% in 2020, before a recovery in 2021. The structure of the Spanish economy – turned heavily towards services and with a high proportion of SMEs – suggests that the economic shock could be greater than in other industrialised countries. Endemic unemployment could intensify, leaving a lasting mark on growth over the medium term. However, the improvement in public finances before the virus outbreak and a more stable political situation gives the government some leeway to face the crisis.
