Conjoncture

Conjoncture

    Conjoncture - 02 March 2021
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    Looking beyond the short-term economic shock, the Covid-19 pandemic and the exceptional health protection measures introduced to contain the virus raise many questions as to the lasting consequences of the crisis. The issue of zombie firms, which is far from new, has taken on a whole new dimension, as their weight in developed economies has progressively increased since the 1980s. Massive public interventions to tackle the effects of the pandemic, whether by governments – debt moratoriums, cancellations of employer social security contributions, widespread use of short-time working schemes, etc. – or by central banks – increase and prolongation of asset purchases schemes – could result in keeping non-viable companies afloat, raising fears of a zombification of economies.
    Before the onset of the Covid-19 pandemic, the United Kingdom had already begun to come out of the “age of austerity”, to borrow a phrase from former Prime Minister David Cameron. The massive intervention of UK authorities to support the economy through the Covid-19 sanitary and economic crises has significantly strengthened this trend. The government deficit ran at almost 20% of GDP in 2020, and the ratio of government debt to GDP increased by twenty percentage points to nearly 100%. Once the crisis is over, some adjustments will be needed. That said, the Treasury’s eagerness to bring public finances back under control rapidly could be counterproductive if it stifled the economic recovery. Moreover, long-term prospects, particularly demographic trends, suggest that balancing the government’s books will be no easy task.
    Conjoncture - 18 February 2021
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    Zambia’s recent sovereign default has cast a shadow of a looming wave of debt restructuring in Sub-Saharan Africa. The Covid shock has brought a significant risk of debt distress in several African countries, by exacerbating vulnerabilities that have built up over the past decade. While liquidity facilities through the DSSI and emergency lines have provided temporary support to many countries in the region, solvency issues remain and the prospect of debt restructuring is gaining ground. In this context, the methodology of the IMF and the World Bank remains the most suitable tool for assessing debt sustainability for low-income countries. The framework for common treatment of restructuring has recently been extended to all creditors. Given the scale of its financial commitments to African countries, China’s participation is essential. So far, the country has demonstrated a lack of transparency and limited cooperation. Its commitment to the common framework for debt treatment thus remains to be confirmed.
    Conjoncture - 12 January 2021
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    In third-quarter 2020, Turkish GDP had already returned to pre-Covid levels. Turkey’s economic recovery can be attributed to massive policy support – both fiscal and monetary –, which also involves risks. Inflation is significantly above 10%, and unlike many other emerging countries, the current account swung into a deficit again, which triggered a sharp depreciation in the Turkish lira. Faced with rising tensions, President Erdogan voiced to change the direction of economic policy. It should now have two pillars: a more rigorous policy mix, with a monetary policy that targets a lower inflation rate and greater attractiveness for non-resident investors. If these factors are sustained in the long run, they should help reduce volatility and release the bottlenecks that have weighed on Turkish growth over the past five years.

On the Same Theme

Central Europe: return to pre-Covid GDP levels likely in 2021 5/5/2021
Growth in Central Europe looks set to accelerate in the 2nd quarter of 2021, after already a good performance in the 2nd half of 2020, as indicated by the capacity utilisation rate in the manufacturing sector. This highlights good resilience despite a shortage of chips in the automotive sector and a fairly severe 3rd wave of Covid in the 1st quarter of 2021. Improving business conditions in the industrial sector stem from the on-going recovery in demand, specifically for exports: this has already allowed economic activity in the Czech Republic and Slovakia to move above pre-Covid levels, whilst the Polish and Romanian economies have returned to around pre-crisis levels. This performance should allow the region’s GDP to recover its pre-Covid levels before the end of 2021 (growth of 4.2% compared to the 3.8% contraction in 2020), notwithstanding a loss of activity in services that will hold for longer. It is also likely to support inflation (along with the chips shortage and oil prices recovery), which is likely to remain close to 3% on average for the 3rd year in a row.  
Green investments, public debt and financial markets 4/26/2021
Limiting global warming will require huge investments, which will partly have to come from the public sector. This could lead to a crowding-out effect. Higher public borrowing requirements could push up interest rates and weigh on private investments. In the near-term such a risk seems remote. On the contrary, there could be a crowding-in effect with a reduction in climate-related risk and positive second-round effects from green public investments stimulating private investments. To reduce the risk that financial markets would exclusively focus on the impact on public indebtedness, governments should communicate clearly on the nature of their investments, insisting that they should have a return which is a multiple of the borrowing cost. 
Nordic countries: Greater confidence? 3/31/2021
In the northern European countries, the economic impact of the Covid-19 crisis in 2020 was one of the mildest in the European Union, with GDP contracting only about 3% in Sweden, Denmark and Finland, compared to a Eurozone average of more than 6%. To what extent has this enabled the economic agents of the Nordic countries to have greater confidence than their European neighbours? According to the latest European Commission surveys, the economic sentiment index picked up strongly in March 2021, a trend that can be seen in most of the European countries. Calculating the current level of the confidence indexes for each country based on the spread with the long-term average[1], we can see that the greater confidence (or less mistrust) relative to the Eurozone is fairly widespread in Sweden, with the exception of the construction sector. In particular, Sweden has the highest economic sentiment index in Europe, buoyed by the industrial component. In Denmark, the profile of business confidence seems to be very similar to that of the Eurozone as a whole: confidence is slightly higher than the long-term average in industry and construction, but is severely eroded in services. Lastly, Finland seems to be lagging behind, and its confidence indexes often seem to be lower than those of its trading partners, especially in industry and services. [1] Average since 1 January 2000. Note: the economic sentiment index has already been standardised with a long-term average of 100, but this is not the case for the other indexes.
Retail and leisure: mobility momentum continues to pick up in Europe. 12/11/2020
The latest Google Mobility Report - published on 6 December – shows that customer traffic flows to retail and leisure businesses in Europe early this month continued to build on the momentum reported end November. This momentum is the result of the easing of containment measures in Europe...
EBA reactivates its guidelines on moratoria on loan repayments 12/9/2020
Due to the lengthening of the health crisis, the European Banking Authority decided on 2 December 2020 to reactivate its guidelines on legislative and non-legislative moratoria on loan repayments. This decision aims at easing credit instructions criteria for granting moratoria. Moratoria granted in relation to the COVID-19 pandemic before 31 March 2021 will not automatically be considered as a forbearance measure. However, such moratoria must have benefitted a sufficiently large set of borrowers and their granting must have been based on a criterion other than solvency. The beneficiaries of moratoria that aim at preventing a default will no longer automatically be considered in default. Only moratoria of less than nine months will benefit from this temporary easing of the rules (excluding those granted before 30 September 2020). Finally, credit institutions will have to document to their supervisor their method for estimating the probability of default of borrowers benefitting from a moratorium.  
Southern Europe: why such low potential growth? 11/30/2020
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?
Towards a resumption of Banking consolidation in Southern Europe? 9/16/2020
CaixaBank and Bankia, respectively the third and fourth largest Spanish banking groups in terms of CET1, formalized on September 3, 2020, the opening of negotiations for a potential merger. If it materialized, this operation would consolidate the Spanish banking system. The level of concentration of the latter is comparable to that observed on average in the euro area, following two successive waves of consolidation between 2008-2009 and 2012-2013 from which CaixaBank and Bankia themselves emerged. The question is whether or not this could be the prelude to a broader movement of concentration that the ECB has been in favour of since several years. Indeed, the banking supervisor sees consolidation as a way to improve the financial profitability and resilience of banks1. It is in this perspective that, in July 2020, it published a consultative document aimed at encouraging bank mergers2. [1] See for example the interview of Edouard Fernandez-Bollo, ECB representative to the Supervisory Board, « Consolidation can secure safe and sound banks » in ECB’s Supervision Newsletter, August 2020. [2] ECB, Guide on the supervisory approach to consolidation in the banking sector – Draft, July 2020.
Nordics not particularly optimistic despite smaller recession 9/9/2020
While Europe has been hit hard by the Covid-19 pandemic, Nordic countries have been relatively less affected – with the exception of Sweden, where restriction measures have been particularly soft. As a result, Nordic economies have been among the most resilient in Europe. In the second quarter, GDP fell by “only” 8.3% in Sweden, 6.9% in Denmark, 5.1% in Norway, and 4.5% in Finland. That compares with drops of 9.8% in Germany, 13.8% in France, and nearly 12% in the euro area as a whole. That said, businesses and consumers in Nordic countries are not especially optimistic about the economic outlook, which certainly reflects the region’s reliance on global trade. Since the start of the Covid-19 crisis, the Economic Sentiment Indicators (ESI) for Sweden and Finland have moved in line with that for the euro area. Meanwhile, the indicator for Denmark has markedly underperformed. Although these countries look fairly well positioned to weather the crisis – notably thanks to their economic model – lack of confidence could be a clear drag on economic recovery there.
Recovery fund: will the EU kill two birds with one stone? 7/29/2020
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]. When excluding the most developed countries (in red), it appears that grants will particularly benefit those that profit the least from their membership to the EU’s single market – according to the results of three studies that seek to quantify these benefits. That is partly a coincidence, as the Covid-19 pandemic has particularly affected countries that benefit relatively less from the single market, such as Italy and Spain. Nevertheless, this also expresses the EU’s two-pronged strategy: improving the resilience of the most fragile countries in addition to facilitating the recovery in the whole region. The aim is to avoid further economic divergence between member states. Overall, all countries should profit. Those benefiting the least from grants count, to support their exports, on demand from the other countries, for which economic disaster has been made less likely by the recovery plan. [1] Bruegel, Having the cake, but slicing it differently: how is the grand EU recovery fund allocated?, 23 July 2020
Classification of European banks according to their business model: an objective approach 7/28/2020
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. In addition, we apply a divisive (top-down) hierarchical classification that appears to perform better than its agglomerative (bottom-up) version, which is more common in the literature. Finally, the retention of a supplementary principal component, in addition to the two that are traditionally retained, improves the quality of our classification.

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