After the deepest recession in recent history, economic activity is turning up again due to the gradual easing of the lockdown measures in Switzerland and the neighbouring countries. The exceptionally accommodative monetary and fiscal policy stances are also contributing to the recovery. SMEs have made use of the special loan programme and employees have benefitted from the short-time work scheme. Nevertheless, the recovery is likely to be slow, and economic activity is unlikely to return to pre-crisis levels before end 2022. The government is confident that the Covid-related debt can be repaid without raising taxes.
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%.
With 50,000 new cases reported daily – twice as many as at the beginning of June – and the number of hospitalisations on the rise, the Covid-19 pandemic is in the midst of an alarming resurgence in the United States. Granted the number of cases increases with the increase in testing, but this alone is not a sufficient explanation. The government’s response to the crisis is also to blame. In the European Union, where lockdown restrictions and business closures were implemented earlier and more systematically than in the United States, the situation seems to be better under control. Estimates of economic losses must be approached cautiously. The economy is rebounding on both sides of the Atlantic after reporting historically big contractions of about 10% in the second quarter
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.
Mexican real GDP fell by 19.9% year- on- year in April. At the same time, industrial production plunged by 30% (the manufacturing component fell by more than 35%). In addition to the domestic impact of lockdown measures, economic activity has been hit by the fall in the oil price, disruption in supply chains, and the sharp decline in external demand (especially from the US) affecting both the export and tourism sectors. The Central Bank has lowered its policy rate (by 225 basis points since January, to 5%) and announced several series of measures aimed at supporting the economy, but this will not be sufficient to cushion the shock. Indeed, the government, preferring to stick to its fiscal austerity policy, has not announced a major fiscal plan to support the economy
Our barometer shows an improvement in China’s economic momentum during the period between March and May 2020, compared to the preceding three months. This came as no surprise as economic activity collapsed in February, the first month of the lockdown, before beginning a very gradual recovery in March...
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
Major economic policy responses have been introduced to try to attenuate the impact of the Covid-19 pandemic on the economy. This document reviews the key measures taken by central banks and governments in a large number of countries as well as those taken by international organisations. It includes measures that were introduced through 15 June. It will be updated regularly.
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...
There were no exceptions. As expected, the US economic barometer, which covers all or part of the data available through May 2020, is signalling the worst recession to have hit the United States since 1946 ...
The publication by the ECB of different economic scenarios illustrates the extent of uncertainty which at present surrounds the forecasts for key macroeconomic variables. As a consequence, companies may hold off investing, preferring to wait for better visibility. While understandable at the micro level, such a wait-and-see attitude could act as a drag on growth and reinforce the view of companies that their caution was warranted. The large increase in the dispersion of earnings forecasts points to huge uncertainty at the individual company level. However this has not stopped the US equity market from rallying. Although several factors help to explain these different reactions to uncertainty, such dissension cannot last forever
The gradual easing of lockdown measures has for the month of May, as expected, led to an improvement in the manufacturing PMIs in all countries with the exception of the Netherlands and Japan. The extent of the rebound however varies greatly between countries [...]
The Covid-19 crisis will not be without its consequences for the Russian economy, which faces twin supply and demand side shocks against the background of collapsing commodity prices. According to forecasts from the IMF and the Russian central bank, economic activity could contract by between 4% and 6%. Macroeconomic fundamentals are likely to worsen, but without undermining the government’s ability to meet its obligations. However, this latest shock will weaken a banking sector that is in full restructuring mode and could delay the important government development projects that will be essential to boosting growth over the medium term. Against this background, on 2 June the government announced a new plan of RUB 5 trn (4
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.
Across time and countries, financial crises and, more broadly, recessions and recoveries, have had much in common. Recessions predominantly impact the demand side whereas the influence on the supply side is more limited. This time is different. The pandemic-induced recession will have a longer lasting influence on the allocation of household expenditures, if not on the level of spending. More than a normal recession, it will also have major repercussions on the supply side, through changes in global value chains, working from home or the disruption of the economics of businesses which are confronted with a forced capacity reduction on social distancing grounds.
Economic activity contracted sharply in February, the first month of the lockdown, before rebounding very gradually in March and April. The recovery is bound to be very slow after this brutal first-quarter shock [...]
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
Fed Chair Powell’s comment about what would happen in case of a prolonged recession has weighed heavily on equity markets. Historically, recessions are accompanied by major equity market drawdowns. The year-to-date decline is more limited, which stands in stark contrast with the plunge of activity. Massive monetary and fiscal policy support has led to a reassessment of the distribution of risks, which goes a long way in explaining the rebound of equity markets. The focus is now shifting to the outlook for corporate earnings, hence the importance of the debate on the shape of the recovery.
In the USA, as elsewhere, the paralysis of activity caused by the Covid-19 pandemic has affected the production of statistics, which have become harder to interpret. The rebound in hourly wages in April indicated by the “pulse” is a false signal and should be treated with caution: it can be explained by the collapse in hours worked, against which wages always show a certain inertia. Not only is the information gathered from companies incomplete, but there may well have been a lag between the shutdown of businesses and the stopping of wages [...]
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.
