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COVID-19 economic update – April 8, 2020


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Our Economics department keeps track of all the important developments in the financial markets in both advanced economies and emerging markets. We are publishing periodic briefings with analytical assessments of the current macroeconomic and financial market situation. Find out more about the EIB Group's response to the crisis


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Economic data and forecast continue to point to a very deep recession this year. German industrial output is expected to post a pronounced drop over the next three months according to the latest reading of the Ifo index, which fell to -20.8 in March (from +2 in February), the biggest drop since the start of the survey in 1991. Growth forecast for German economy, complied twice a year by Germany’s top five economic research institutes on behalf of the government, point to a contraction of 4.2% this year, with a strong rebound next year to 5.8%1Banque de France expects GDP to shrink by 6% in the first three months of 2020, the most significant decline since WWII and similar to Q2 1968 when student-let protest movements transformed the country. The central bank added that GDP would probably decline by 1.5% for every two weeks of confinement. UniCredit also released new forecasts, showing that the euro area economy could shrink by 13% this year, with contractions ranging from 18.6% in Greece, 15.5% in Spain, 15% in Italy, 13.8% in France, 10% in Germany and 9.1% in Austria. While this is now one of the most pessimistic forecasts for this year, UniCredit also expects a robust rebound, at 10% in 2021, which is not the case for a majority of other forecasters. Newly released forecasts by IHS Markit expect eurozone growth to contract by 4.5% this year before recovering to 1.2% in 2021. All in all, the majority of recent economic forecasts, point to a severe recession this year, with the euro area economy shrinking two-to-three times as much as during the 2008-2009 financial crisis, with a strong disagreement on 2021 growth. The considerable differences in projections by major forecasting institutions underscore the considerable uncertainty faced by the European and global economy. Against this backdrop, further revisions of growth figures for 2020 and 2021 are to be expected.

Zooming in on services and car manufacturing provides additional insights on the magnitude of the hit for some sectors of the EU economy. We take a closer look at Services Purchasing Managers’ Index (PMI) and car registrations, as they are among the sectorslikely to be hit hardest by the shock. A sudden stop in car registrations can be observed across in several European countries. In Italy, car registration declined by 85% in March, while in France and Spain they are down 72% and 69% respectively (Figure 2). Services PMI also dropped dramatically, to 17.4 for Italy (the minimum observed during the 2008-2009 crisis was 37.2) and to 27.4, 23 and 31.7 for the other three countries (Figure 3).


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In addition to PMI and European Commission survey indicators, we use a wide range of data to build a coincident indicator of economic activity. These coincident indicators are a widely used tool in macroeconomics to ssummarise all the available information at a given point in time2. The chart below depicts coincident indicators for the four largest EU countries (Figure 4), which are at the moment also hardest hit by the pandemic. The coincidence indicator3 depicts a substantial decline of economic activity in all four countries, with a particularly sharp drop for Italy. This is hardly surprising, given that Italy was the first country in Europe to be hit by the shock and hence the first one to impose strict containment measures.


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Most forecasts crucially depend on the assumptions we make on how long it will take to get back to normal. Several observers suggest that in a few months, the most acute phase of the virus will be behind us. Yet, some social distancing measures are likely to remain in place longer, and for some sectors the recovery will be particularly gradual. To have a better sense of what firms are expecting, we take a closer look at the forward-looking component of the European Commission Survey, more specifically the “Expectations of demand in the next three months” for the services sector (Figure 5) and the “Production expectations” for manufacturing sector (Figure 6) from the European Sentiment Indicator. They provide valuable insights into the most significant sectors of the EU economy.

With a few exceptions, the ranking of the most affected sectors is rather similar across EU member states at the current juncture. It is, however, likely that the negative country impact will be shaped by the respective weight of the most affected sectors in the overall structure of the economy. Moreover, some general considerations are due: the loss in demand for some consumer non-durable manufactured products (Figure 6) will not be recovered (i.e. the spring fashion collection) but after some time, the economy will gradually normalise. Purchases of durable goods will likely be postponed for as long as the crisis lasts and the same will happen to investment goods, with corporates postponing capital expenditures. In the services sector (Figure 5), normalisation could be, however, longer. For instance, services that are linked to people’s movement, such as tourism, travelling and the ones involving crowded locations, such as restaurants, have come to a complete stop. It is unclear how long it will take to resume previous consumption patterns. However, it is likely that consumer behaviour will remain impacted for a prolonged period and that some components of services will take very long to recover fully. In other words, while a progressive relaxation of containment measures to get people back to work can happen sooner, going back to a 'normal' social life will probably take much longer. Meanwhile, pharmaceuticals, telecom and IT services could experience stronger demand now and in the future.

An initial assessment of most exposed sectors in terms of value added by Member States shows that some countries are more exposed to shock than others. This assessment is also conditional on policy measures undertaken to support demand (particularly for investment goods by corporate and durables by consumers) and the evolution of the pandemic, i.e. the length of containment measures (particularly affecting services). Figure 7 compares the exposure of different EU countries to the potentially most hit sectors. The pink columns refer to negatively affected industries; the blue columns represent the positively affected industries. In the lower part of the figure, in the pink columns, the cells highlighted in green are showing the countries for which the specific industry has a higher share (on total value added in that country) than the average, and the darker the colour, the higher the share. In the case of the red colour (the darker, the lower) the countries’ share is lower than the average. For positively affected sectors (those in the blue columns) red is the colour highlighting higher shares and blue is the colour for lower shares. The upper part of the table simply ssummarises the countries with higher shares.


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1. These forecasts were made jointly by Ifo, the German Institute for Economic Research in Berlin, the Kiel Institute, the Halle Institute for Economic Research and RWI in Essen. They also expect the public deficit to reach 4.7% this year and public debt to increase by about 10 p.p., to 70% of GDP.

2. There are several examples of coincident indicators, in Europe the EuroCoin is probably among the most famous ones. The methodology used in this note is similar to the Chicago Fed National Activity index. https://www.chicagofed.org/publications/cfnai/index

3. It encompasses more than 100 time series for each country, with a delay of maximum two months. It combines all the answers given in business and consumer confidence surveys, consumer prices, producer prices (various goods and sectors) industrial output, export, statistics on orders and on sales and some financial indicators. 


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 European financial and corporate sector indicators remained mostly stable this week. The funding cost of EU corporates has stabilised; however, as the crisis lengthens, liquidity needs increase. Despite substantial policy support, issuance of debt securities remains subdued and credit lines, which were put in place to protect smaller corporates, are mostly effective in the very short term. They, however, may fall short of the funding needs as the crisis continues. Also, financial institutions’ credit risk remains at higher levels, though it stabilised somewhat last week. The Itraxx indexes for senior and subordinated debt (a measure of credit risk represented by an average of credit default swap (CDS) spreads of the main European banks’ debt) remained relatively unchanged last week and stood respectively at 81bps and 210 bps, which is below the recent peaks reached in 18th March (Figure 9). Looking forward, recent rating cuts in the banking and corporate sector –especially oil, automotive and automotive suppliers - point that further downgrades can be expected in both sectors.


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The COVID-19 crisis is reducing the creditworthiness of sovereigns across the world. As a result, the three main credit rating agencies downgraded numerous countries (including  South Africa, Nigeria and Argentina) and their activity is well above the 2019 average (Figure 9). So far, no EU country has been downgraded, although Belgium, Croatia, Cyprus and Malta had their outlook lowered in March and the UK was downgraded by Fitch). With the crisis persisting, the impact on public finances and the economic performance continues to grow, and more downgrades, including for the European Union, cannot be excluded in the coming weeks.


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