We expect GDP to shrink 11.1% this year and grow by 5.9% next year. The unemployment rate could reach 9%, its highest level in 22 years. Different branches of the government have announced measures to counter the impact of the covid-virus but federal government formation talks are still ongoing, which complicates matters. As public debt is expected to come in at 123% of GDP by the end of the year, the room of maneuver is limited, but the need to support the economy will take priority, at least for now.
Despite successfully managing the Covid-19 pandemic, Greece will not avoid a severe recession in 2020. The tourism industry – which accounts for nearly 20% of the country’s GDP – offers no guarantee for a solid recovery. The prospect of a resurgence in contamination in Europe will weigh on the tourism sector in the coming months. The Greek banking system will further weaken, and public debt will rise sharply. That said, the European Central Bank (ECB) has launched the Pandemic Emergency Purchase Programme (PEPP) in March, which allows the ECB to purchase Greek sovereign debt. This has kept a lid on sovereign rates. This difficult context may entice the government to draw a recovery plan that targets strategic sectors less linked to the tourism industry.
Due to the late implementation of lockdown measures, the UK was hit hard by the Covid-19 pandemic. Consequently, the country is reopening after its European neighbours, and its economy has been particularly affected. The return to pre-crisis levels will therefore be long and difficult. What’s more, the risk of a protracted crisis is all the greater due to two major threats looming on the horizon: a second wave of the pandemic requiring lockdown measures to be imposed again; and failure to negotiate a free-trade agreement with the European Union before the end of the year.
At first sight, Sweden ranks among the countries best positioned to face the global economic crisis triggered by the Covid-19 pandemic. The government’s restrictive measures were not as stringent as in most other developed countries (shops and restaurants remained open, for example), the Swedish economy does not have much exposure to the hardest hit sectors, and the authorities have comfortable policy leeway. Yet the country also presents some vulnerabilities that make us less optimistic about its capacity to rebound. Among those are its dependence on global trade and households’ financial situation.
Faced with the Covid-19 pandemic, the authorities rapidly imposed strict protective measures that effectively maintained the health crisis under control. The economy was also in a relatively good position at the beginning of the crisis – notably thanks to low unemployment and public debt – and fiscal as well as monetary support measures were quickly introduced by the government and the central bank. With all that in mind, the OECD estimates that Denmark will be one of the most resilient economies in 2020, forecasting a fall in GDP “limited” to 5.8%.
The recession of 2020 is unique in nature and, in recent history, in depth. It should be followed by an equally unique recovery. The first phase should be particularly strong and driven by the easing of lockdown measures. Thereafter, growth should be essentially demand-driven. The lockdown-induced drop in demand led to forced savings. Tapping into these excess savings should provide a considerable boost to consumption. However, a significant deterioration in the employment outlook would mean that the forced savings during the lockdown would morph into precautionary savings, implying growth disappointments and a negative feedback loop.
In the past decades, German enterprises have been offshoring activities, in particular to Central and Eastern Europe and China. Despite the slowing of the globalisation pace in recent years, German industry is still losing ground in textiles, chemical and pharmaceuticals, and computers, electronic and electrical equipment. Despite China’s dominance in global manufacturing production, Germany has remained an important global and regional player. Supply chains disruptions related to Covid-19 have increased calls for a reassessment. However, it is unlikely to lead to radical changes in global supply chains. Only in case of market failures, as seen in the field of pharmaceuticals, policies should be developed to correct them.
Are we over the worst? In the short term, that would seem to be the message from the latest economic data for May and June at our disposal. Having hit record lows in April, activity indicators posted a rally in May, and an even steeper recovery in June. This recovery was expected, despite the public health measures still in force, given the ending of the lockdown in the eurozone member states. However, the economic activity is still weaker than in normal periods (pandemic free) [...]
The Covid-19 shock has triggered a significant fiscal policy response by European Union member states. Even though it is likely to be short-lived, the 2020 recession will be historic. The fiscal response has therefore been essential in avoiding much more serious and longer-lasting economic consequences. Member states have not all been affected in the same way by the current crisis, and the scale of their fiscal responses varies. The European response has been one of the few positive aspects of the crisis. However, the challenges are not yet over. Levels of risk and uncertainty on both the public health and economic fronts will remain particularly high over the next few months
The Central European countries are exposed to the impact of the Covid-19 pandemic on trade flows, through their integration in multi-country supply chains. In the short term, it creates spillover effects from the contraction in economic activity observed in Western Europe, particularly in Slovakia and the Czech Republic, via the automotive sector. Although the Central European countries moved up the value chain in the automotive industry, the proportion of a vehicle built locally has not widely increased in recent years
Corporate sentiment has jumped following the easing of Covid-19 related restrictions. There is a risk of excessive enthusiasm because better business expectations do not tell us where we are in terms of the level of activity and demand. The current phase of the rebound is mechanical. It shows that the supply side starts to function again. The real question however is what happens to the demand side in the coming quarters. Companies and households are confronted with limited visibility, so caution will prevail.
The significant shrinking of the blue area in today’s Pulse indicates that the economic climate has substantially deteriorated during the past three months because of the lockdown measures in order to stop the Covid-19 pandemic. However, there were some remarkable differences [...]
While the economic horizon cleared up a bit in May, the improvement was much bigger in June. Given its construction, our Pulse does not yet show any traces of this rebound, which is just as remarkable as the preceding plunge [...]
The barometer for Spain has begun to improve with the introduction of post-lockdown data, but it continues to fluctuate around historically-low averages [...]
Recent economic data have improved on the back of the easing of lockdowns. This may create a feeling of false comfort. The effects of the severity of the crisis will make themselves felt well into the future. A key factor is the rise in unemployment and in unemployment expectations. Both weigh on household spending, due to related income losses and increased precautionary savings. The major national central banks of the Eurosystem expect unemployment to increase in 2021, despite the economic recovery. When visibility remains limited and the pressure on profits high, many companies have no other option than to reduce their labour force
Having contracted by 5.8% in March, the UK’s GDP plummeted by more than 20% in April, with industrial production and retail sales down 24.3% and 18.7%, respectively. This is its biggest monthly fall since the data series began in 1997. However, economic growth will probably return quickly, due to the gradual easing of lockdown measures – most ‘non-essential’ shops have reopened this week – and to monetary and fiscal support...
The European Commission has recently published the 2020 Digital Economy and Society Index (DESI). DESI is a weighted average of five indicators: connectivity, citizens’ digital skills, use of internet, integration of digital technology in businesses, and digital public services. Scandinavian countries perform the best, with Finland, Sweden and Denmark at the top of the ranking. Italy is only 25th, while France (16th), Germany (12th) and Spain (11th) are close to the EU average. The Covid-19 crisis and the lockdown have led to a greater use of digital technology
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
