Unemployment has started to rise in the European Union. In April, the EU seasonally-adjusted unemployment rate was 6.6%, up from 6.4% in March 2020. Eurostat estimates that about 14million people in the European Union were unemployed in April, an increase of 397 000 from March. Youth unemployment rose to 15.4%, a rise of 160,000 compared with March.
All in all, a strong contraction of economic activity is projected for 2020 in the latest euro area forecasts. The new release of ECB forecasts projects the euro area economy to contract by 8.7% in 2020 and expand by 5.2% in 2021 and 3.3% in 2022, confirming a U-shaped recovery, although one in which GDP will take longer to return to pre-crisis levels. Growth projections have been significantly revised downward by 9.5 p.p. for 2020 and upward by 3.9 p.p. and 1.9 p.p for 2021 and 2022, respectively, compared to the ECB March forecast. Inflation is expected to slow substantially, reaching 0.3% this year before increasing to 0.8% and 1.3% in 2021 and 2022, reflecting to large extent energy prices. Core inflation (all prices excluding energy, food and changes in indirect taxes) is expected to reach 0.8% in 2020, 0.7% in 2021 and 0.9% in 2022. The ECB also expects the unemployment rate to peak at 10.1% in 2021, and average general government debt in the euro area to reach 101% in 2020. Due to the high uncertainty, the ECB also developed two alternative economic scenarios1. In the mild scenario, the euro area would contract by 5.9% this year, before expanding 6.8% in 2021 and 2.2% in 2022. In that scenario, GDP would return to its pre-crisis trajectory by 2022. In a more negative scenario, GDP would contract by -12.6%, before increasing 3.3% in 2021 and 3.8% in 2022.
1.2. Financial markets and access to credit
European stock markets, corporate financing and banks
European stock markets strengthened in recent weeks. Stock prices of non-financial corporations in the European Union have continued to slowly rise from their lows of late March. Since then, non-financial corporation stocks have recovered about half of their price, bouncing back from the lows (about a 30% loss) recorded since the beginning of the year. Conversely, since late March, banks stock prices have remained almost flat, hovering around 40% below January 2020 levels.
Economic sectors have been affected unevenly by the crisis. Since the beginning of 2020, stock markets have priced in a large decline in certain sectors, namely industrial goods, travel and leisure, and automobiles, than for any other sectors. Conversely, pharmaceutical, retail, telecom and health care services have not only rebounded from the lows hit in late March but are also close to or above December 2019 levels (Figure 3). According to many analysts, given expectations for company earnings, equities valuation is very high, supported by ample liquidity provided by central banks.
Corporate bond yields remained unchanged over the month and moved within a narrow range of 15 basis points in May (Figure 4). After rapid gains during the first half of March, the yields of non-financial corporate bonds have declined since late April, declining from 160 basis points to 130 basis points for BBB-rated corporates and from 120 basis points to 80 basis points for A-rated corporates (Figure 9). Since peaking late March, the price of risk has decreased despite credit downgrades of many companies2. The net effect on firms’ funding costs is unclear.