Forecasts made at the start of the year will probably turn out to be accurate. Spain is set to be the Eurozone’s economy hardest hit by the Covid-19 epidemic. We forecast GDP to shrink by 11.8% in 2020 before rebounding by 7.0% in 2021. The social situation has worsened again this year, forcing the government to introduce new large-scale welfare benefits (e.g. minimum living income), which will be reinforced in 2021. Spain’s huge €140 billion stimulus plan will support the recovery, should raise the country’s potential growth and create jobs. But the structural budget deficit is widening
We expect the Belgian economy to lose 7.2% of its size this year, followed by a 3.8% increase next year. After a strong recovery in the third quarter, private consumption is expected to decline again at the end of this year, but not as much as during the first lockdown. So far, structural damages seem to have been mainly avoided, with bankruptcies close to their normal level and unemployment rates stable since the beginning of the year. Government support measures have no doubt played a crucial role in this but once these measures are discontinued, some long term scarring will take place.
The government decreed a second lockdown in November due to the rapid rise in Covid-19 infections. Business indicators point to a fall in activity. Thanks to the short-time work scheme, unemployment has only risen moderately. Moreover, inflation has remained at a relative high level compared to other eurozone countries. In 2021, fiscal policy remains very accommodative and the deficit might only shrink to 6.3% of GDP. The economy is projected to rebound by 3.5% in 2021 compared with a slump in 2020 (-7.5%). A major downside risk is the increased indebtedness of the non-financial corporate sector.
In Q2 2020, Finland stood out from the rest of Europe as the country that reported the smallest decline in GDP – “only” –4.4%. Yet the ensuing recovery was less vigorous than for its EU neighbours, and Finland will surely continue to underperform in the months ahead. Even so, the Finnish economy is still one of the most resilient in Europe, thanks notably to the relatively feeble spread of the virus and robust support from the fiscal and monetary authorities.
Greece’s economic recovery will be fraught with uncertainty in 2021. The Covid-19 hit to activity could last longer in the tourism industry – a key sector for the country – than in other sectors. The decline in tourist inflows in summer 2020 has limited significantly the rebound in Q3 GDP, which was much weaker than in other European countries. Some confidence indicators, particularly regarding the unemployment outlook, have worsened during the autumn. The conservative government plans to use the large amounts of money allocated by the European recovery fund to finance its stimulus plan, details of which will be finalised early next year. Despite that, public debt is likely to remain above 200% of GDP by the end of 2021, which is very worrying from a long-run perspective.
The record fall in UK GDP in the second quarter gave way to unprecedented growth in the third, and the news that an effective vaccine against Covid-19 will soon be widely available suggests that the economy could start its definitive recovery in 2021. However, the UK is not out of the woods yet. Given that a second national lockdown was introduced in England in November, there is little doubt that economic activity will drop again in the fourth quarter. Moreover, the strength of the recovery is, because of Brexit, more uncertain than elsewhere. This not only because of the UK’s decision to leave the EU’s single market and customs union, but also due to continued uncertainty over whether a free-trade agreement will be found.
Since March 2020, Sweden has adopted a more relaxed approach to the COVID19 outbreak as no lockdown has been imposed to the population. However, the recent pick up in new infections could slow the recovery down in Q4 2020. Pervasive uncertainty will continue to hamper exports and corporate investment, while household consumption is fuelling the economic recovery. In 2021, the Riksbank will maintain and expand its vast asset purchasing programme. New expansionist measures are expected to bolster an already accommodating fiscal policy.
Norway was not hit as hard by the Covid-19 pandemic as most its European neighbours. Moreover, the economy has been able to count on considerable support from the fiscal and monetary authorities. In its draft budget for 2021, presented in October, the government has pledged to maintain an expansionist policy, even if spending will logically not be as high as in 2020. What’s more, faced with an upturn in Covid-19 cases and tighter restriction measures, the central bank has adopted a more conciliatory tone.
The Danish economy has quickly rebounded after the reopening of the borders but a complete catch-up will take time since the resurgence of the Coronavirus epidemic keeps the country’s economic situation uncertain. Services exports were hard hit by the crisis in 2020, but are offset by a surge in Danish household consumption, supported by government measures. Fiscal policy should remain accommodative in 2021 and the Central Bank of Denmark will continue to defend its peg with the euro.
Spain, Greece, Italy and Portugal have been hit hard economically by the Covid-19 epidemic. These countries have also suffered for many years from sluggish potential growth, which is among the lowest in Europe. The main obstacles are more or less the same: a low level of investment and productivity, and a slowing - or even declining - demographics which weigh on the workforce. How have these different factors evolved? What may be the impact of the current economic crisis on structural growth? Which levers to operate?
With only a few weeks left before the end of the transition period that has extended the United Kingdom’s de facto membership of the European Union, considerable uncertainty remains about Brexit and its consequences. Whatever the outcome of the current negotiations on a free trade agreement, it is clear that this will be a hard Brexit. From this observation, a number of important questions emerge. What will be the consequences of the UK’s withdrawal from both the EU’s single market and customs union? What effect will Brexit have on the UK economy, and will it differ across sectors? How will Brexit influence future economic policy in the UK?
While Italy's real GDP fell by 12.8% q/q in the second quarter of 2020 (after -5.5% in the first quarter), the non-performing loan (NPL) ratios of sectors of activity that have been subject to administrative closures, in particular, continued to decrease. Surprising as it may seem, this development can be explained. On the one hand, public guarantees on new loans have contributed to increase the outstanding amount of "healthy" loans to these sectors[1], diluting NPL ratios. On the other hand, sales of NPLs continued in 2020 (albeit at a slower pace than in 2019), which reduced the outstanding amount of NPLs and contributed to the cleaning up of bank balance sheets
According to the INSEE flash estimate, private payroll employment in France rebounded by 1.8% q/q in Q3 2020, after dropping 2.5% in Q1 and 0.8% in Q2. France has recouped a little more than half of the jobs losses in H1 (345,000 jobs out of a total of 650,000). Employment is now 1.5% below its pre-crisis level, compared to 4% for GDP. Job variations have been remarkably smoother relatively to GDP, both on the downside and on the upside. This reflects the massive use of job-retention schemes enabled by the government’s decision to strengthen the system as part of emergency measures taken last spring to cushion the shock of lockdown. Employment is expected to decline again in Q4, in the wake of the economic activity relapse under the impact of the new lockdown
The Q3 2020 rebound in the Eurozone GDP growth was stronger than expected: 12.7% q/q, compared to expectations of 10.5%. Of the region’s four biggest economies, France reported the strongest rebound followed by Spain, Italy and Germany. This rebound only partially erased the massive negative shock earlier this year. In Germany, France and Italy, GDP was still about 4% below the Q4 2019 level, while Spanish was still down by 9%. All components of demand contributed to French GDP growth. Sector differences reveal the heterogeneous impact of the shock. In all four countries, the rebound was largely mechanical, but other factors also came into play. Emergency measures to offset the impact of the lockdown last spring constituted a strong support
The Covid-19 crisis has hit an economy that had already been in recession since mid-2019. In Q2 2020 (which was the period when lockdown measures were the tightest), real GDP collapsed by 16% q/q seasonally-adjusted. Activity contracted sharply across all sectors in April before reviving slowly. The economic growth rebound from H2 2020 is expected to be difficult. Real GDP is projected to contract by 8.5% in 2020 and should increase by a mere 2.5% in 2021. Economic growth will remain constrained by South Africa’s very low potential growth, resulting notably from deep structural brakes such as weak human capital and deficient transport and energy infrastructure. The social context, with very high levels of poverty, income inequality and unemployment, is worsening further this year
Amidst low investment and stagnant productivity, Brazil has primarily relied on favorable demographics (labor accumulation) to grow. In the face of rapid population ageing and a decline in fertility rates however, Brazil’s demographic dividend has been gradually fading. Brazil will have to alter its pattern of growth and find avenues to stimulate capital investments and improve total factor productivity if its economy is to achieve higher medium-term growth prospects (i.e. lift potential growth). The administration has embraced this challenge through an ambitious structural reform agenda anchored on two complimentary pillars: enhancing the business environment and transforming the role of the state in the economy
Has household consumption, the driving force behind French growth, stalled? Or was it actually in the process of rebounding? In 2019, household consumption rose at an average annual rate of 1.5% in real terms, which is considered to be a disappointing performance. But “disappointing” on what grounds and from which standpoint? Are we really dealing with a feeble rebound? These are difficult questions to answer, since everything depends on the perspective we take and the determinants we look at. In this article, we will try to put household consumption into context, and provide answers and explanations for the above issues. In a descriptive analysis in part one, we examine household consumption’s role as a growth engine, its momentum and composition. The second part is explanatory
According to the polls, Democrat Joe Biden is well placed to beat Republican Donald Trump and win the presidential election on 3 November 2020. However, because of the unusual US election process, the result is far from a foregone conclusion. There is also the threat of the result being disputed, and it could be delayed. President Trump’s record, which for the sake of fairness should be assessed up to the start of the pandemic, is mixed. Although GDP, jobs and especially share prices rose rapidly, the deterioration in the public finances was unprecedented in peacetime, while inequality increased. Higher tariffs did little to reduce the trade deficit. Environmental protection went sharply into reverse under Trump
After contracting 8% year-on-year (y/y) in Q2 2020, Russian economic growth is struggling to recover. In August, monthly GDP was still down 4.3% y/y. Household confidence and the business climate are both morose, and activity has barely rebounded. Adjusted for seasonal variations, industrial output was still 7% lower in August than the year-end 2019 level, even though oil production was increased as of 1 August as part of OPEC agreements. According to survey data, we should not expect to see a significant rebound in September either (PMI in manufacturing dropped below the 50 threshold separating expansion from contraction). Corporate investment continues to slump, as illustrated by the contraction in capital goods imports, and is still 5% below the 2019 average
The economy continues to recover. Initially driven by a rebound in industrial production and investment, the recovery broadened over the summer months. Exports have rebounded and activity has also picked up in the services sector. Yet it continues to be strained by the timid rebound in household consumption, which is far from returning to normal levels. The unemployment rate began to fall right again after the end of lockdown measures, but this decline has been accompanied by an increase in precarious jobs and large disparities, with the unskilled and young college graduates being particularly hard hit.
Once again, South Korea seems to be withstanding the crisis better than developed nations generally. The effective management of the health crisis and the government’s massive stimulus package paved the way to a shallower recession than in other countries in the first half of 2020. However, the new social distancing measures introduced at the end of August and the persistent weakness of exports will hold back growth over the coming months. In the short to medium term, macroeconomic fundamentals are likely to remain very solid: government deficit and debt levels remain modest, inflation is under control and external vulnerability is very low.
Between April and June 2020, India’s economy contracted by nearly 24% compared to the same period last year. This unprecedented contraction can be attributed to the collapse of domestic demand. Although the economy has rebounded since June, it is still fragile and well below pre-crisis levels, prior to the outbreak of the Covid-19 pandemic. The central bank and government did not have much support capacity, but even this has been eroded by higher prices and a drop-off in fiscal revenue. Public debt is expected to swell to nearly 89% of GDP, and will strain the country’s future development projects, especially given that government spending contributed to nearly 30% of growth last year.
For the first time since the 1998 crisis, Indonesia is expected to enter recession in 2020. In Q2 2020, the economy contracted by more than 5%, and the recovery should be slow. Domestic demand is struggling to pick up, and Jakarta has just been put under a partial lockdown again. Fiscal support has been slow in coming: planned fiscal spending still hasn’t materialised in the first seven months of the year. Even so, the deficit is under control and the central bank is acting as the lender of last resort. In H2 2020, the government hopes to consolidate the recovery via a massive support package for low-income households. Even though inflation is under tight control, the poverty rate could reach 11.6% according to the World Bank (vs 9.2% in 2019).
The epidemic remains in full swing, but has shown some signs of deceleration. The recovery in Q3 has been stronger than expected. However, the picture varies considerably from one sector to the next. The central bank has paused its monetary easing cycle for the first time since mid-2019. At the same time, it has adopted a more active communication stance through the embracement of forward guidance. The emergency aid programme – which will push the budget deficit to a record high – has meanwhile helped President Bolsonaro witness a resurgence in popularity. Negotiations over the 2021 budget are likely to crystallise tensions across the executive and Congress
The health crisis has slammed an economy that was already suffering from more than two years of recession. GDP will probably contract by more than 10% in 2020. With the technical rebound that began in late Q2 and the signing of a public debt restructuring agreement, the country should manage to pull out of recession in the second half. Yet financial instability persists with the erosion of foreign reserves, the stark disconnection between official and parallel exchange rates and expectations of surging inflation. The authorities have tightened forex controls again. IMF support is essential for financial stability but might not suffice for a sustainable recovery.
