EcoFlash of 02 July 2021
    The fiscal response to the health crisis has been swift, substantial and multi-pronged. Emergency measures, seeking to cushion the recessive shock and facilitate economic recovery, have been joined by recovery packages that support the ongoing upturn and pave the way for future growth. There are, however, disparities between countries as to the sums involved and the distribution of the measures. On our analysis, Italy has made the biggest effort, with a total running at 71% of GDP. It is followed by Germany, with 47%, Spain, with 31%, and France with 26%. As a percentage of GDP, Germany, France and Italy have made greater use of liquidity measures and guarantees, whilst Spain has focused on fiscal measures. Short-term fiscal measures have, on average, been split fairly evenly between businesses and households. In order to underpin the recovery, Italy and Spain have favoured long-term measures, whilst France and Germany have concentrated on the shorter term. Long-term measures are structured around four strategic directions: the environment, competitiveness, cohesion and health. In all four countries, the share devoted to the environment is the largest. The distribution between the environment, competitiveness and cohesion pillars is most equal in France. Germany, meanwhile, stands out for the size of its competitiveness programme and the relatively small size of its cohesion budget. In Spain, these two areas are given equal weight. In Italy, more has been allocated to cohesion than competitiveness. Lastly, investments in the health sector represent a not-insignificant share of long-term measures in Germany and Spain, but are relatively small in France and Italy.
    EcoFlash of 04 June 2021
    Eurozone member states mobilised massive public resources in response to the Covid-19 emergency, providing support for households as well as companies facing a loss of business. As a result, the public debt ratio rose sharply in 2020 to 98% of GDP. Since there is still a big need for economic support in the first part of the year, the Eurozone debt ratio will probably cross the threshold of 100% of GDP in 2021. The ECB plans to continue purchasing assets as part of its Pandemic Emergency Purchasing Programme (PEPP) at least until March 2022, at a time when the Eurosystem currently holds nearly 30 percentage points of GDP in Eurozone public debt instruments. The first disbursements of the Next Generation EU recovery plan are slated for the second half of 2021. At this point, the European Commission estimates that 40% of the grants allocated by the Recovery and Resilience Facility will be spent by the end of 2022, the equivalent of nearly 1% of EU GDP.  
    EcoFlash of 01 June 2021
    The cyclical trough seems to be behind us in the Eurozone at a time when vaccination campaigns in the member states are accelerating. From a macroeconomic perspective, the catching-up dynamic seem to be stronger than expected by many analysts. Yet the general economic improvement masks important sector disparities. The Covid-19 crisis will have stronger and more lasting effects on certain sectors, like hotel and restaurant services. In the months ahead, there is a risk that more companies will go bankrupt, especially in the hardest hit sectors.
    EcoFlash of 21 May 2021
    World trade in goods has rebounded very strongly, even though major divergences exist between regions due mainly to widely contrasting health and economic situations. The turnaround in services exports has been much slower, with transport and tourism still holding at very low levels. Trade in information and communication technology (ICT) services was much more resilient in 2020. Brexit triggered a sharp increase in the number of new trade agreements in 2021. Two major trade agreements negotiated by the European Union are still pending, one with Mercosur and the other with China. Negotiations between the United States and China are also at a standstill after the failure of bilateral talks held in Alaska in mid-March.
    EcoFlash of 10 May 2021
    Employment and the jobless rate are both expected to rise in 2021, but the size of these movements is very uncertain. The rise in employment is likely to be limited, while the upturn in the jobless rate risks being big. The France Relance recovery plan will surely help boost employment. Uncertainty over the size of its rebound is linked in part to the vigour of the economic recovery. Above all, employment recovery will be hampered by several headwinds: the lagged impact of the GDP plunge in 2020, the increase in corporate bankruptcies, persistent sector differences, the return to work of furloughed or short-time workers, and corporate efforts to restore productivity gains and margins. As to the unemployment rate, the dynamics of employment and the labour force are both uncertain. There is also the question of the profile of the increase in the jobless rate in 2021. Will it be a continuous increase or a bell-shaped curve? The most likely scenario is the first one, with a sharper increase in the first half that eases in the second half. The French labour market is unlikely to return to good health in 2021 (as defined by the government in its unemployment insurance reform), but the year 2022 seems like a more realistic horizon.
    EcoFlash of 04 May 2021
    In the United States, there has been a series of “once-in-a-generation” recovery plans that have little in common. Unlike the USD 1.9 trillion “American Rescue Plan” adopted in March, the nearly USD 2.3 trillion “American Jobs Plan” proposed by President Biden is geared towards the long term and aims to be fully financed through taxes. Designed to defend America’s strategic interests, the plan’s philosophy is similar to the American Recovery and Reinvestment Act of 2009. Yet the Biden administration is not foregoing a multilateral framework: its plan is also intended to serve as a vehicle for international fiscal harmonisation. 
    EcoFlash of 19 April 2021
    Eurozone inflation rose markedly in Q1 2021 and seems to be extremely volatile. Core inflation, which is usually stable, has been moving in fits and starts.The rebound in goods prices largely explains the broad increase in inflation. Prices of tradeable services have also picked up, notably in the sectors that were hit hardest by the pandemic, such as transport. The recent acceleration in prices is being driven by temporary factors: changes in VAT rates, higher crude oil prices, and the revision of HICP weights. Inflation could continue to rise over the next few months.These temporary effects should dissipate at the beginning of next year. Thereafter, there seems to be very little risk of an inflationary surge in the Eurozone.
    EcoFlash of 06 April 2021
    In 2020, the Covid-19 pandemic had a much smaller impact on the French labour market than on GDP. On an average annual basis, GDP growth plunged 8.2% while private payroll employment declined by only 1.7%. The unemployment rate even fell slightly compared to 2019 (-0.4 points on an average annual basis). Employment was buffered by emergency support measures, notably the massive use of job retention schemes, which is the main reason why the overall negative impact was so mild. Yet the impact was disproportionate by sector: in Q4 2020, compared to the year-earlier period, 75% of payroll job losses were concentrated in the four sectors hit hardest by the crisis (hotel & restaurant services, household services, transport services and transport equipment manufacturing), even though their employment share is 5 times smaller (16%). The counterintuitive fluctuations in the unemployment rate can be attributed to the misleading effects of methodology. During lockdowns, numerous jobseekers exit the labour force because they cannot actively seek work and/or show that they are available to work. As a result, they no longer qualify as jobseekers according to ILO criteria. Instead, they are counted as part of the halo around unemployment, which has increased sharply. Underemployment, which includes short-time work, has also risen rapidly. The impact of the crisis on hiring declarations and the number of category A jobseekers is more in line with what one would expect.
    EcoFlash of 23 March 2021
    Totalling USD 1.9 trillion or 9 percent of GDP, the American Rescue Plan ranks among the largest stimulus packages ever launched in the United States. The plan aims to overcome the Covid-19 pandemic, but does not stop there. The new supportive measures, combined with those approved in December 2020, could rapidly bring the US economy under pressure; Inflation is not the biggest threat, even though it is expected to rise above 2%. The surge in prices is likely to be short lived since global competition and the accelerating digital revolution are bound to have a moderating effect. Among the possible harmful effects is the risk of fuelling speculative behaviours in certain market segments (tech stocks, high-yield bonds…).  
    EcoFlash of 22 March 2021
    The VVD (conservative free-market liberals) and D66 (social liberals) were the big winners at the general election held on 17 March, by gaining 35 and 23 seats, respectively. However, the CDA (Christian Democrats) lost heavily. The populist right won slightly as the losses at the PVV were compensated by a huge gain by the FvD, which had campaigned against the lockdown measures. The parties on the left suffered severe losses and tumbled from 37 seats in the old parliament to only 26. In particular, the losses of the Greens were surprising given the importance of environmental issues for the Dutch electorate. As the country has been going through the worst crisis since World War II, the formation of a new and stable government is highly desirable. Given the election results, the government formation period can be relatively short, in particular if the CDA is willing to join VVD and D66. Prime minister Mark Rutte has already expressed his preference for such a coalition.

On the Same Theme

Southern Europe: IFRS 9 put to the test by the Covid-19 pandemic 6/2/2021
The economic shock caused by the Covid-19 pandemic has resulted in a sharp increase in banks’ cost of risk. This has been particularly steep for the Spanish, Italian and Portuguese banking systems, which are notably oriented towards retail banking and have relatively high levels of exposure to the sectors most affected by the pandemic. Moreover, the effects of the sanitary crisis on the cost of risk have been exacerbated by the forward-looking approach of the IFRS 9 impairment model for financial instruments, which has been in force since 1 January 2018. Under this accounting standard, it is not the defaults themselves that give rise to the recording of provisions for impairment, but the mere expectations of such defaults. Banks have therefore recorded more provisions at this stage of the economic shock than they would have under the superseded IAS 39, which might not necessarily be the case throughout the entire economic cycle. This said, the increase in the cost of risk in southern Europe has been limited, to some extent, by the margin of appreciation left to the banks’ discretion, coupled with governmental support measures and their preferential accounting treatment. Thus, the Covid-19 pandemic has represented a baptism of fire for the accounting principles embodied in IFRS 9. Despite an internal capacity to generate capital that has been reduced by the squeeze on financial profitability, due to decreasing revenues and increasing costs, southern European banking systems have, overall, sufficient loss-absorbing capacity to enable them to withstand a possible increase in credit risk, provided that the health situation remains under control.
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.
Europe: the shock of Covid-19 and the fear of accelerated zombification 3/2/2021
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.
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.

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