Banks report tighter credit standards for loans to enterprises in the second quarter and expect a further substantial tightening in the third quarter. Euro area banks tightened somewhat their standards for loans to enterprises in the second quarter, contrary to the expectations registered in April BLS, when banks said they expected a loosening of credit standards for loans to enterprises. Nevertheless, the tighter credit conditions reported by euro area banks are not as harsh as during the global financial crisis or the sovereign debt crisis. Going forward, banks expect credit standards to tighten considerably for firms in the third quarter, as guarantee schemes in some large EU countries come to an end and asset quality deteriorates. This aggregate picture, however, masks important differences across countries. Credit standards on loans to enterprises tightened in Germany and loosened in France, Italy and Spain. For housing loans, credit standards tightened in Germany, France and Spain and remained unchanged in Italy.
The International Monetary Fund (IMF) emphasized that the longer the slump, the greater the need to carefully target fiscal support to highly indebted countries in the European Union. The IMF also called for a greener EU recovery. The IMF published projections for the European Union in June. It expects gross domestic product (GDP) to contract 9.3% in 2020, before growing 5.7% in 2021, and to return to its 2019 real GDP level only in 2022 , according to the IMF’s forecast, which confirms a longer, U-shaped recovery.
The IMF warned of potential social unrest due to the crisis in Middle East and Central Asia region. In its Regional Outlook, the IMF expects the region’s GDP to contract 4.7% this year, falling two percentage points from the level in April, with a number of downside risks, including social unrest and political instability, as well as potential renewed volatility in global oil markets. In particular, MENA (Middle East and North Africa) economies are expected to shrink 5.7% on average in 2020, before recovering 3.4% next year.
In Asia, the latest economic projections and data remain mainly bleak, while in China the situation is gradually improving. Singapore’s economy shrank by 41.2% in the second quarter compared to the first quarter, following a 3.3% contraction in the first quarter. The economy shrank 12.6% year-on-year in the second quarter. The Bank of Japan has kept monetary policy on hold, but revised down growth projections. It now expects the economy to contract 4.7% in 2020, with consumer prices falling 0.5% in the same period. The economy should recover in 2021, growing 1.5%. On the plus side, China’s GDP exceeded forecasts to grow 3.2% in the second quarter, compared with the same period last year. Strong industrial production, which increased by 4.4% in the second quarter, and robust exports (+0.5% year-on-year in June), buoyed the economy. Unemployment declined to 5.7% in June, while retail sales remained weak and fell 3.9% in the second quarter compared to a year earlier.
Political uncertainty intensified in Ivory Coast after the death in early July of Prime Minister Amadou Gon Coulibaly, the presidential candidate of the incumbent RHDP party in upcoming presidential elections scheduled for October 2020. Coulibaly’s death could prompt in the country’s aged president, Alassane Ouattara, to run for a third term, or for the acting prime minister, Hamed Bakayoko, to run for president. Another presidential candidate could also emerge or elections could be postponed due to the coronavirus pandemic.
Moody’s Investors Service said the pandemic made a debt restructuring in Zambia more likely. Moody’s sees Zambia’s debt burden rising to 110% of GDP as the budget deficit remains persistently large and the currency continues to depreciate. According to the Zambian Ministry of Finance, the government is seeking a two-year debt moratorium from Group of 20 nations. In the meantime, Fitch Rating affirmed its long-term issuer default rating of CCC for Mozambique.
The ECB decided to keep monetary policy unchanged following a meeting of its Governing Council 16 July. The ECB reiterated that incoming data was signalling a gradual recovery of economic activity in the euro area, although the level of activity remained well below levels before the pandemic hit and the outlook was highly uncertain. The ECB also said that ample monetary stimulus remained necessary to support the economic recovery and to safeguard medium-term price stability.
EU leaders are convening for a special European Council meeting in Brussels on 17 and 18 July with the aim of agreeing to the European Union’s long-term budget and the recovery fund. The size of the recovery fund and its structure (grants/loan mix) remain the main points of contention. The European Council president, Charles Michel, presented the proposal for the multiannual financial framework (MFF) and the recovery package ahead of the council meeting July 10. The proposal puts forth a slightly smaller budget (the proposed size of the MFF is €1.074 trillion) but maintains a plan for €500 billion in economic recovery grants for EU members as a part of a total planned recovery fund of €750 billion. The Council proposal envisages the repayment of joint debt to start in 2026, two years earlier than the European Commission proposed, and includes plans for new budget revenues (a plastic tax) as well as potentially exploring other “own resources.”
Croatia and Bulgaria received the green light to be part of the Exchange Rate Mechanism (ERM-II) and the Banking Union. Both countries are expected to adopt the euro in two years. The ECB has also set base rates for their currencies: 1.95583 Bulgarian Lev per euro (the rate in place since 1997) and 7.5345 Croatian Kuna per euro. The agreement on participation in ERM II is accompanied by a firm commitment from national authorities to pursue sound economic policies, maintain economic and financial stability, and achieve a high degree of sustainable economic convergence with other EU members, in line with the Maastricht convergence criteria. From 1 October, the Single Supervisory Mechanism will directly supervise the two countries’ largest banks and the Single Resolution Board (SRB) will become the resolution authority for big national banks and all cross-border groups. The SRB will also oversee resolution planning for smaller banks.
Shareholders of the European Bank for Reconstruction and Development (EBRD) have approved Algeria’s application to become a member. The EBRD is already active in the southern and eastern Mediterranean region, with a presence in Egypt, Jordan, Lebanon, Morocco, Tunisia, and in the West Bank and Gaza. To date, the EBRD has invested over €12 billion in 260 projects across the region.
As of mid-July, stock prices of non-financial corporations in Europe stand 5% to 10% below December 2019 levels, with very large sectoral differences (Figure 3). The sectors most affected by the confinement measures, such as travel and leisure and real estate, are lagging behind the recovery. Conversely, the stock prices of companies boosted by the crisis have gained. Health care, pharmaceutical and retail stock prices have surpassed December 2019 levels. Automakers and their suppliers, whose share prices declined during the peak of the crisis, have almost entirely recovered, possibly the result of supportive government measures.