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...
After falling by more than 25% between March and April, UK GDP rose by 1.8% in May. While restriction measures only started to be eased in mid-June, this increase still disappointed expectations. None of the forecasters polled by Reuters was banking on such a small rise, and the consensus expected a 5.5% rebound. This is explained by the services sector’s poor performance. While the industrial production and services indices both fell by about 25% between March and April, the former rose by 6.0% in May whereas the latter ticked up by only 0.9%. It is very likely that conditions in the services sector will improve more rapidly in the coming months. After all, most non-essential shops started welcoming customers again on 15 June, and the tourism and hospitality sector reopened on 4 July...
Following the example of the Term Funding Scheme (TFS) introduced by the Bank of England (BoE) in the summer of 2016, the Term Funding Scheme Small and Medium-sized Enterprises (TFSME) announced in March 2020 aims to support the supply of loans to businesses via a four-year refinancing program granted to credit institutions at a lower rate than that of the main refinancing operations[1]. Unlike the TFS, the TFSME more specifically targets the financing of small and medium-sized enterprises (SMEs). Above all, operational since April 15, the scheme resulted in GBP11.9bn drawdown from credit institutions on 27 May and already came with a significant drop in average borrowing rates of the all private non-financial companies (SNFs), and even more so in the case of SMEs
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...
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...
