Perspectives

After the virus, the threat of zombies

Eco Perspectives // 4th quarter 2020 (completed on 30 September 2020)  
economic-research.bnpparibas.com  
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GERMANY  
AFTER THE VIRUS, THE THREAT OF ZOMBIES  
A strong rebound is expected in Q3 (7.2%) following the progressive lifting of restrictions. Nevertheless, the recovery  
is likely to remain slow and bumpy at times, at least until there is a Covid-19 vaccine or a better treatment. Thanks to  
the widespread use of furlough, the labour market has held up reasonably well. However, the scheme may also have  
been delaying a necessary restructuring, which could weigh on the long-term performance of the economy. The huge  
increase in public spending to ease the economic consequences of the virus have forced the authorities to activate  
the debt brake exemption clause. The excess debt will be repaid over 20 years starting in 2023.  
A REBOUND, BUT NOT IN ALL SECTORS  
GROWTH AND INFLATION (%)  
The lockdown measures to contain the coronavirus resulted in a  
sharp drop in activity in Q2 in Europe. In Germany, GDP contracted by  
GDP Growth  
Inflation  
9
.7%, which compared reasonably well with the rest of the Eurozone  
Forecast  
Forecast  
(
-12.6%). An important reason for this was that the lockdown measures  
8
6
were less strict in Germany, as the authorities succeeded in limiting the  
spreading of the virus by widespread testing.  
4.7  
4
Starting at the end of April, lockdown measures have been progressively  
lifted resulting in a rebound in activity. After having reached a trough  
in April (74.4), the ifo business climate index gradually improved in  
the following months and reached 93.4 in September (2015=100).  
Nevertheless, activity has remained well below pre-crisis levels. In  
July, manufacturing production strengthened by 0.3% on the previous  
month, the third consecutive improvement, but was 12% lower from a  
year.  
1.5  
1.9  
1.6  
1
.4  
2
0.6  
0.6  
0
-2  
-4  
-
-
6
8
-
5.6  
2018  
2019  
2020  
2021  
2018  
2019  
2020  
2021  
The sector most affected by the pandemic was services, as social  
distancing requirements made it difficult to resume activity. Retail  
sales rebounded strongly after April. In July, sales were 5.6% higher  
than a year ago. By contrast, the hospitality sector continued to suffer.  
Despite the strong rebound in turnover in accommodation and food in  
July (22% from a month earlier), it was still 27% lower compared to last  
year. Overall, the economy is likely to have rebounded strongly in Q3,  
by 7.2% (to be announced end October).  
CHART 1  
SOURCE: BNP PARIBAS GLOBAL MARKETS  
IFO CLIMATE INDEX SIGNALS UPTURN  
20  
Upturn  
Sep  
Boom  
July  
0
FURLOUGH MAY DELAY RESTRUCTURING  
Jan '19  
-
-
-
-
20  
40  
60  
80  
Despite the collapse in output in Q2, the labour market held up  
reasonably well. The unemployment rate (ILO definition) inched up to  
May  
March '20  
4
.4% in July compared with 3.8% in March. The main reason for this  
subdued reaction is the widespread use of furlough (Kurzarbeit). Ifo  
estimates that in August, the number of Kurzarbeiter fell by one million  
to 4.6 mn, i.e. 14% of socially insured employment. The decline was  
mainly due to the trade and the hospitality sectors. Nevertheless, in  
the hospitality sector still 34% of the employees are on furlough.  
The advantage of Kurzarbeit is that firms would not lose skills during  
the crisis. Once demand picks up, staff is available again immediately.  
However, this argument sounds less convincing the longer the crisis  
lasts. Moreover, Kurzarbeit does not only benefit dynamic sectors  
that are only suffering a temporary decline in activity. It also benefits  
sectors such as the embattled car and metal industries, and postpones  
their necessary restructuring. Furthermore, Kurzarbeit is also widely  
used in the hospitality sector. In this case, the scheme is not aimed  
at protecting skilled labour and technologically advanced firms but  
serves a social objective.  
April  
Recession  
Downturn  
-
40  
-20  
Current business
 situations  
SOURCE: IFO, BNP PARIBAS  
0
20  
40  
CHART 2  
vein, the coalition parties CDU/CSU and SPD have agreed to extend a  
freeze on insolvency rules put in place to avoid a wave of corporate  
bankruptcies due to the coronavirus crisis. The freeze would have  
been ended in September. A new date to end the scheme has not been  
set yet. The danger is that the very low interest rate environment in  
combination with these policies could create conditions, which are very  
1
conducive to the creation of zombie companies . Zombies can weigh  
Recently, the government decided to keep Kurzarbeit in place at least on the economic performance because they are less productive and  
until the end of 2021. The decision was probably politically motivated, their presence lowers investment and employment at more productive  
as the general election is to take place in autumn 2021. In the same firms.  
1
Zombie companies are firms that are unable to cover debt servicing from current profits over an extended period.  
The bank  
for a changing  
world  
Eco Perspectives // 4th quarter 2020 (completed on 30 September 2020)  
economic-research.bnpparibas.com  
1
1
DEBT BRAKE TEMPORARY OUT OF ORDER  
THE FALL IN THE OPERATING SURPLUS WILL WEIGH ON INVESTMENT  
The pandemic has not only led to a historic output slump, but also to a  
record budget deficit, which could reach 7% of GDP in 2020. One third of  
the deficit is related to the automatic stabilisers, such as disappointing  
tax receipts and higher social expenditure due to the shrinking of the  
economy. The rest is due to two special packages introduced by the  
government in March and June.  
Non-financial sector:  
13  
Net operating surplus (as % of output)  
Investment (%, y/y, RHS)  
30  
20  
10  
0
12  
The first package, worth EUR 750 billion, included fiscal measures to  
support the healthcare system and mitigate the economic impact of the  
lockdown measures on enterprises and households. This was followed  
in June by a comprehensive stimulus programme worth EUR 130 billion  
that did not only have demand measures, but also included measures  
to strengthen future growth and sustainability. These packages in total  
will increase the deficit by 5% of GDP.  
The debt ratio is set to climb from 60% end 2019 to 75% end 2020. The  
exceptional circumstance forced the authorities to activate the debt  
brake exemption clause. The excess debt will be repaid over 20 years  
starting in 2023.  
11  
1
0
9
8
7
-10  
-20  
-30  
2004  
2006  
2008  
2010  
2012  
2014  
2016  
2018  
2020  
4
-QUARTER MOVING AVERAGE  
CHART 3  
SOURCE: DESTATIS, BNP PARIBAS  
A BUMPY RECOVERY  
Even though the economy is showing clear signs of rebounding, the  
recovery is likely to remain slow and bumpy at times, at least until  
there is a Covid-19 vaccine or better treatments. GDP is projected to  
rebound by 4.7% next year after the 5.6% contraction in 2020.  
On the demand side of the economy, the current boom in retail  
spending is likely to fizzle out quickly if consumers remain wary about  
the virus. Moreover, the deterioration of the employment outlook is  
likely to lead to an increase in precautionary savings. Hence, the saving  
ratio might remain at a relatively high level. Finally, consumers might  
bring forward their purchases before the end of December ahead of  
the end of the temporary VAT cut. In addition, investment could remain  
sluggish due to squeezed profit margins, as companies may find it  
difficult to recuperate the Covid-19 related costs in sales prices.  
The bank  
for a changing  
world  
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