Perspectives

Perspectives

    Perspectives - 15 July 2020
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    The easing of lockdown measures has caused a significant improvement in business sentiment and a mechanical rebound in activity and demand. In the near term, the narrowing of the gap between observed and normal activity levels should gradually lead to less spectacular growth numbers. These are underpinned by pent-up demand, monetary and fiscal policy support and the possibility for households to use the extra-savings accumulated during the lockdown. A lot will depend however on how uncertainty evolves. The health situation is not under control in certain countries and there are concerns about the risk of a flare-up. Households face income uncertainty due to bleak labour market prospects. Against this background, companies may tune down their investment plans.
    In spring 2020, partially paralysed by the Covid-19 pandemic, the US economy entered the worst recession since 1946. Global activity contracted by more than 10% in Q2 before picking up slightly since the month of May. The question is how much of the lost ground can be recovered. With the approach of summer, business surveys are improving and the equity markets are rebounding, signalling rather optimistic expectations, possibly excessively so. Bolstered by the Federal Reserve’s liquidity injections, the markets could be underestimating the risk of corporate defaults, especially given their increasingly heavy debt loads. The latest statistics on the propagation of the virus are not good.
    The economy has been recovering gradually since March, and the rebound in real GDP should be strong enough to enable it to recover rapidly the ground lost in the first quarter. Yet the shock triggered by the pandemic and the ensuing lockdown measures has severely weakened some sectors (such as export-oriented industries), some corporates (notably micro-enterprises and SMEs) and some households (especially low-income earners). The central bank has cautiously eased credit conditions and the government has introduced a stimulus plan estimated at about 5 points of GDP for 2020. Public investment in infrastructure projects remains the instrument of choice, but direct support to corporates and households is also expected to boost private demand.    
    Like the vast majority of economies, Japan will go into recession in 2020. The expected rebound in 2021 is likely to be relatively mild. The latest economic indicators reveal an economic situation that is still highly deteriorated compared to normal times. Once again, massive fiscal stimulus has been set in motion. The Bank of Japan’s monetary policy, notably through the Yield Curve Control, should largely reduce the risk of higher financing costs due to the expected rise in public debt.
    Although the Eurozone member countries seem to have the first wave of the Covid-19 pandemic well under control, they are now facing major economic hardships. The most recent leading economic indicators are showing signs of a turnaround but the road ahead will still be long. It will be hard to fully absorb the loss of activity reported at the height of the crisis. Public policies will play a crucial role. In the months ahead, the probability is very high that there will be a sharp increase in the jobless rate, especially for long-term unemployment, and a series of corporate bankruptcies. The European Central Bank (ECB) is providing member states with very favourable financing conditions. A response at the European level must come through, and the Recovery Fund needs to be set up rapidly.
    With the gradual easing of the lockdown restrictions, economic activity has shown signs of rebounding. The government stimulus plan might give further impetus to growth and also contribute to lower carbon emissions. The prospect of an EU stimulus is good news for Germany’s export-oriented manufacturing sector. However, in the absence of a Covid vaccine or better treatments the recovery is likely to be bumpy. GDP is unlikely to return to its pre-Covid level before 2022
    After a massive recessionary shock, the French economy has been showing signs of recovering rather rapidly since May, raising hopes for a V-shaped recovery. Markit’s composite PMI index and household spending on goods both rebounded spectacularly, which is encouraging. But these gains were largely automatic and will lessen as the catching-up effect wears off. To return to pre-crisis levels, it will probably take longer to close the remaining gap than it took to regain lost ground so far. There are several explanations: sector heterogeneity, ongoing health risks and the scars of the crisis. We foresee a U-shaped recovery (-11.1% in 2020, +5.9% in 2021). The risks seem to be well balanced, thanks notably to support measures that have already been taken or are in the pipeline.
    The outbreak of Covid-19 took hold in Italy earlier than in other EU countries, with strong negative effects on the economy. In Q1 2020, real GDP fell by 5.3%. The contraction affected all economic sectors: manufacturing, services and construction. Domestic demand had a negative contribution (-5.5%). Italian households become extremely cautious, reducing expenditures more than income: the propensity to save rose to 12.5%. The pandemic has dramatically hit the labor market: disadvantaged categories, such as low skills workers, those with precarious contracts and young people, are the most severely affected by the lockdown.
    The unprecedented economic contraction in H1 2020 raises serious doubts about the upcoming recovery. Although the reopening phase has proceeded smoothly so far, the recovery in employment was very small in June. Tourism remains under the threat of a resurgence of the Covid-19 epidemics in Europe. The swelling public deficit will force Prime Minister Pedro Sanchez to design a tight recovery package that balances between short-term emergency measures and long-term investments. This difficult equilibrium is likely to heighten the tensions in the governing coalition between Podemos and the socialist party. Subsidies allocated as part of the European Recovery Plan would give Spain some fiscal leeway, but the final terms and amount of the funds are yet to be finalised.     
    We expect GDP to shrink 11.1% this year and grow by 5.9% next year. The unemployment rate could reach 9%, its highest level in 22 years. Different branches of the government have announced measures to counter the impact of the covid-virus but federal government formation talks are still ongoing, which complicates matters. As public debt is expected to come in at 123% of GDP by the end of the year, the room of maneuver is limited, but the need to support the economy will take priority, at least for now.
    Despite successfully managing the Covid-19 pandemic, Greece will not avoid a severe recession in 2020. The tourism industry – which accounts for nearly 20% of the country’s GDP – offers no guarantee for a solid recovery. The prospect of a resurgence in contamination in Europe will weigh on the tourism sector in the coming months. The Greek banking system will further weaken, and public debt will rise sharply. That said, the European Central Bank (ECB) has launched the Pandemic Emergency Purchase Programme (PEPP) in March, which allows the ECB to purchase Greek sovereign debt. This has kept a lid on sovereign rates. This difficult context may entice the government to draw a recovery plan that targets strategic sectors less linked to the tourism industry.
    Due to the late implementation of lockdown measures, the UK was hit hard by the Covid-19 pandemic. Consequently, the country is reopening after its European neighbours, and its economy has been particularly affected. The return to pre-crisis levels will therefore be long and difficult. What’s more, the risk of a protracted crisis is all the greater due to two major threats looming on the horizon: a second wave of the pandemic requiring lockdown measures to be imposed again; and failure to negotiate a free-trade agreement with the European Union before the end of the year.
    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%.
    Perspectives - 08 April 2020
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    The COVID-19 pandemic has caused a sudden stop in an increasing number of countries. This in turn had led to international spillovers via a decline in foreign trade and an increase in investor risk aversion triggering a global rush for dollar liquidity and a surge in capital outflows from developing economies. A forceful reaction has followed in major economies in terms of monetary and fiscal policy in an effort to attenuate the impact of the pandemic. The near-term dynamics of demand and activity will entirely depend on the length and severity of the lockdown. Once the lockdown has ended, the recovery is likely to be gradual and uneven and policy will have to shift from pandemic relief to growth-boosting measures, thereby putting additional pressure on public finances.  
    The American people and the US economy will no longer be spared the coronavirus pandemic, no more than any other country. Arriving belatedly on US soil and long belittled by President Trump, the virus is now spreading rampantly, to the point that WHO is now preparing to declare the United States the pandemic’s new epicentre. With its federal structure, the US has taken a scattered approach, leaving each state to decide whether or not to introduce lockdown measures. Although the White House has closed the country’s borders (to the European Union and Canada, among others), it was reluctant to restrict domestic movements of goods and people. Foreseeing recession, the markets have plunged and the central bank has launched a veritable monetary “Marshall Plan”.
    China’s population and its economy were the first to be struck by the coronavirus epidemic. Activity contracted abruptly during the month of February before rebounding thereafter at a very gradual pace. Although the situation on the supply side is expected to return to normal in Q2, the demand shock will persist. Domestic investment and consumption will suffer from the effects of lost household and corporate revenues while world demand is falling. The authorities still have substantial resources to intervene to help restart the economy. Central government finances are not threatened. However, after the shock to GDP growth, the expected upsurge in domestic debt ratios will once again aggravate vulnerabilities in the financial sector.
    The shock of the Covid-19 pandemic comes hard on the heels of a difficult second half of 2019 for the Japanese economy. Like many others, the country is exposed to the economic fallout from this crisis. Its significant economic dependence on China, for imports, exports and tourist flows, further weakens the Japanese economy. The latest economic indicators suggest that the shock will be important. Japan will thus go into recession this year. Lacking adequate room for manoeuvre on the monetary front, fiscal policy will need to provide support. To this end, the Abe government would be preparing a major stimulus package.
    The Covid-19 pandemic has triggered a recession in the Eurozone that looks likely to be deep but short-lived. After a difficult year and a half on the economic front, the Eurozone was showing some resilience and was even beginning to show signs of stabilisation. The current shock – in demand, supply and uncertainty simultaneously – has completely changed the outlook. The health measures taken- which have been necessary to protect the population from the virus- have created the conditions for a recession. Monetary and fiscal policymakers have reacted swiftly and, so far, proportionately. However, the profile of the economic recovery remains unclear and will be crucial in assessing the damage ultimately caused by the pandemic.
    The German economy has come to a standstill because of the almost complete lockdown. To fight the economic consequences, the government launched a massive stimulus plan to increase spending in the health sector, protect jobs and support businesses. Nevertheless, production losses may reach dimensions that are well beyond growth falls in previous recessions. In the worst scenario of a three-month lockdown, GDP growth could lose around 20 percentage points and 6 million people may have to join the short-time work scheme.
    Clearly, 2020 will not be another year of slow but resilient growth as we were forecasting just last quarter. We must now expect a massive recessionary shock triggered by the Covid-19 pandemic. To date, the INSEE estimates the instantaneous loss of economic activity linked directly to confinement measures at 35%, which is equivalent to slashing off 3 points of annual GDP per month of confinement. In March, the business climate was in free fall, which gives us a first glimpse of its scope. A full arsenal of measures have been deployed to mitigate the shock as best possible. According to our estimates, French GDP could contract by 3.1% in 2020, more than the 2.8% decline reported in 2009, before rebounding by 5.4% in 2021. These forecasts are highly uncertain, with risks on the downside.
    The outbreak of Covid-19 hit Italy while the economy was already contracting. The exceptional growth of infected people has brought the Italian Government to take harsh measures, that include stopping all economic activities, excluding those considered as necessary, and imposing a quarantine for the entire population. The combination of an induced supply and demand shocks is going to cause a recession, which is expected to be deep and to last at least until June. In 2020 as a whole, despite the strong support coming from fiscal and monetary policy, the Italian economy should decline by some percentage points.   
    Spain is Europe’s second hardest-hit country by the coronavirus pandemic, and is likely to suffer a sharp economic contraction this year. The economic impact remains hard to quantify. GDP is nonetheless likely to fall by more than 3% in 2020, before a recovery in 2021. The structure of the Spanish economy – turned heavily towards services and with a high proportion of SMEs – suggests that the economic shock could be greater than in other industrialised countries. Endemic unemployment could intensify, leaving a lasting mark on growth over the medium term. However, the improvement in public finances before the virus outbreak and a more stable political situation gives the government some leeway to face the crisis.
    As the country went into a selected lockdown, business confidence plummeted. To limit the economic fallout, the government announced a comprehensive package to protect jobs and businesses, its favourable budgetary position giving it sufficient firing power. Nevertheless, each month of lockdown may reduce output growth by around 2 percentage points. In the case of a rapid recovery, the GDP shrinkage could be limited to around 3.5% in 2020.
    Due to the Covid-19 virus our growth outlook declines by 5 percentage points to -3.5% for the whole of 2020, despite government measures to attenuate the impact of the epidemic. We see strong hits across almost all sectors, most notably construction and real estate related activities. Prime Minister Wilmés was empowered by a “corona coalition”, which provides a welcome if only temporary breather from government formation talks. The government so far managed this crisis in decisive fashion but eventually the bill will have to be footed.
    After what proved to be a rather mild slowdown, Portugal’s GDP growth ended up in the upper range of expectations at 2.2% in 2019. The Covid-19 pandemic will surely erase the country’s enviable performances as whole segments of the economy come to a standstill and the country sinks into a major recession in the weeks ahead. Similarly to its European counterparts, the Costa government is steadily implementing a series of measures to preserve the economic system during the crisis and safeguard the country’s capacity to recover.
    Now a global phenomenon, the Covid-19 pandemic reached the United Kingdom relatively late and did not give rise to immediate protective measures. Having initially opted for a ‘herd immunity’ strategy, Boris Johnson’s government finally decided, on 24 March, to introduce a national lockdown. As in Italy, France and indeed generally across continental Europe, people’s movements and interactions are now limited in the UK. The disease, meanwhile, has spread rapidly, on a trajectory similar to that seen in the worst affected countries. Faced with the health and economic threats created by the pandemic, the government and the monetary policy authorities have introduced an exceptional package of support.
    After the economic slowdown was confirmed in 2019, the global shock of the coronavirus pandemic will probably drive Sweden into recession in 2020. The evaporation of global demand, notably from the European Union and China, will trigger a drop-off in exports, and production channels will temporarily freeze up. Investment and consumption will both be hit. The central bank has adopted unprecedented support measures while the government is devoting its financial manoeuvring room to funding a fiscal stimulus policy that supports jobs and businesses.
    With the coronavirus epidemic and its impact on oil prices, which are plummeting, the Norwegian economy is heading for a contraction in 2020. Exports, which account for 41% of GDP, are likely to be hit first. Norway’s central bank cut its key rate to nearly zero and has considerably increased NOK and USD lending, injecting liquidity into the economy while supporting the currency. The government has introduced fiscal measures to buffer the shock for companies and households.
    The Coronavirus epidemic is also sweeping Denmark, which has now introduced relatively strict lockdown measures. With its very open economy (exports account for more than 50% of GDP), GDP growth will contract in 2020. To mitigate the shock, the government has launched major fiscal support measures, comprised notably of paying compensation for all or part of wages for a 3-month period. The central bank is ensuring DKK and EUR liquidity, after signing a swap arrangement with the ECB.
    Economic activity will plummet under the impact of the Covid-19 pandemic, but not only via the export channel. The recession could become more virulent if household consumption and production channels were also to freeze up. In addition to the ECB’s monetary policy support, the government will also try to use fiscal policy to buffer the shock and limit the decline in employment.

On the Same Theme

The global repercussions of the Federal Reserve’s inflation averaging strategy 9/4/2020
The Fed’s new inflation averaging strategy should have global real and financial spillover effects. The former refer to international trade whereby a more sustained expansion of US GDP should pull along the economies of its trading partners via increased US imports. The financial spillovers are driven by capital flows, monetary policy and risk appetite. These factors are highly intertwined. The new Fed strategy will also force other central banks to revisit their own strategy. This creates an issue for the ECB.
Looking beyond the second quarter GDP numbers 7/31/2020
Unsurprisingly, this week’s GDP numbers for the second quarter were exceptionally bad. The third quarter should see strong quarterly growth, if only because of a powerful base effect. It also leaves room for disappointment however, should the growth momentum start to slip over the summer. In the US, this already seems to have started. In the euro area, business surveys continue to improve and the employment expectations indicator sees a marked increase. Households are not convinced however and their unemployment expectations have remained broadly stable.
Covid-19 and the environment 7/17/2020
Due to the externalities of economic activity, the lockdown has had a considerable impact, not only on the economy but also on the environment. In a post-lockdown world, the question is how and to what extent the experience of the pandemic will influence the environment in the years to come. Covid-19 may make people more health-focused, including how the environment influences one’s health. This may change behaviour in terms of mobility and spending. It may also cause an increase in the allocation to sustainable investments, which in turn could influence corporate strategies. Changes in global value chains can also have an environmental impact. For fiscal policy, there is an opportunity of meeting the short-term goal of boosting the post-pandemic recovery by making investments that contribute to reaching the goals related to climate change and the environment.
How to spend it? Vouchers versus VAT cuts 7/3/2020
The bleak outlook for the labour market implies there is a strong case for measures to boost consumer spending in order to keep the recovery on track. A host of instruments can be considered: vouchers, VAT rate cuts, income tax cuts, tax credits, negative income taxes. Amongst these, a voucher programme offers many advantages given the possibility for fine-tuning the target group, the final beneficiaries, the type of spending and the regional dimension. However, it comes with considerable administrative costs.
Business sentiment continues to improve 7/3/2020
With an increasing number of countries scaling back if not removing the lockdown measures, the purchasing managers’ indices have improved further in June. The world manufacturing PMI is now even above the level reached in February. Big increases have been noted in the US, France, Germany, Ireland, Spain, Turkey, Indonesia and Vietnam. Brazil and India have also seen a considerable improvement, which seems at odds with the health situation in these countries [...]
COVID-19: main fiscal and monetary measures 7/2/2020
This document presents the budgetary and monetary measures taken in several countries as well as the EU and the eurozone to address the economic consequences of the Covid-19 pandemic. It is presented in such a way that it facilitates an international comparison.
The outlook for government bonds yields: some certainties, many uncertainties 6/17/2020
After dropping significantly when the pandemic was spreading, government bonds yields have evolved sideways in April and May, despite a rally in equities – which typically is accompanied by rising yields – and a huge increase in borrowing requirements. For the foreseeable future, two certainties will play a role – the current monetary policy stance will be maintained for a long time; budget deficits will stay high compared to pre-pandemic levels – as well as many uncertainties such as the pace of recovery. In the absence of a second wave, yields should increase somewhat, although central banks will not tolerate a significant increase.
Does forecast uncertainty matter? It depends 6/5/2020
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. At some point company cautiousness or investor bullishness will have to give in.
Purchasing managers’ indices have troughed but the level remains low 6/5/2020
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 [...]
Covid-19, unemployment, human capital and households’ balance sheet 5/28/2020
In the first episode, William De Vijlder takes a look at households’ balance sheets by considering how assets and liabilities are influenced by the pandemic. We will also see how the loss of human capital due to the deterioration of the labour market plays a key role in the post-pandemic economic environment.

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