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
- To take stock of multiple short-term indicators and strengthen our understanding of current and prospective economic developments, we have developed a coincident indicator of economic activity and a heat map of the most exposed EU economies, based on a sectoral approach (Section 1). Due to the specific nature of the shock, hitting services and global value chains substantially, longer-lasting impacts seem to be unavoidable, reinforcing the view that a U shape recovery is the most likely outcome. The majority of recent economic forecasts continue to point to a severe recession this year, with the euro area economy shrinking two-to-three times as much as during the 2008-2009 global financial crisis. The contraction of economic activity is expected to be more severe in some countries, due to their economic structures and the severity of pandemic itself. A number of sectors are set to contract at an unprecedented pace in March and April, as the soft indicators show.
- EU countries have begun to discuss gradual lifts of the containment measures, while introducing sizable policy packages in support of the economy (Section 2), albeit with significant differences across countries. At the euro area level, the European Central Bank (ECB) has further stepped up its crisis response toolkit by introducing new collateral easing measures for banks. The Eurogroup agreed upon measures worth more than EUR 500bn on April 9, including the EIB Guarantee Fund for EU businesses, the European instrument for temporary support to mitigate unemployment risks in an emergency (SURE) and the European Stability Mechanism (ESM) window based on the precautionary credit line. Further work on a Recovery Fund was also set.
- Financial conditions remain tight. The recent pick up in valuations, especially in equity markets, has only partially reversed the losses made over the past two months (Section 3). There has been a record number of downgrades in the corporate sector – particularly in the oil and automotive sector – and, to a much lesser extent, for banks. So far, European sovereigns (with the notable exception of the UK) have been immune to downgrades, although Belgium, Croatia, Cyprus and Malta had their outlook lowered in March. Outside the European Union, several sovereign downgrades have materialised, including South Africa, Argentina, Nigeria. International financial conditions remain tight for the emerging markets asset class against the backdrop of massive capital outflows observed in March.
As of 8 April, almost 1,500,000 infections have been confirmed and more than 80,000 people have died of COVID-19 or virus-related complications. Over 300,000 patients have recovered. The epicentre of the virus has moved from Europe to the US. While the heaviest death toll remains in the European Union at the moment, infections seem to have plateaued in most of the Union (Figure 1).
Some EU Member States have announced new policy measures to mitigate the economic impact of COVID-19 and moved on with the implementation of approved packages. Guarantee programmes have also been stepped up. Some of the new measures include:
- Italy adopted a new support package (“liquidity decree”) that provides for public guarantees for EUR 400bn worth of loans and investments to support businesses of any size and the strengthening of anti-takeover rules.
- Germany introduced a new guarantee instrument to speed up liquidity provision to SMEs, offering qualifying companies loans from banks, backed by a federal guarantee covering 100% of the loan amount through KfW, Germany’s national promotional bank.
- The Croatian government introduced an additional working capital loan scheme for SMEs, a set of measure to help the agriculture sector, increases in the minimum wage as well as payments for its contributions and temporary tax exemptions.
- In Romania, new support measures include deferral of payments for healthcare and social contributions, utilities payments and an extension of loan repayments for 9 months for all debtors.
- Cyprus introduced new legislation granting government guarantees to loans for enterprises and self-employed workers, totalling up to EUR 2bn. The country also adopted a suspension of the repayment of capital and interest instalments for loans to financial organisations, until the end of the year, covering natural persons, self-employed workers who are current in their obligations, as well as credit institutions such as loan management companies and insurance companies. .
- Hungary announced additional economic measures, setting up two funds: one to focus on protective measures against the spread of the pandemic (EUR 1.8bn), and another one to mitigate its economic impact (EUR 3.7bn). In parallel, the Central Bank of Hungary also announced further measures.
The ECB announced a new, additional package of temporary collateral easing measures1, to facilitate an increase in bank funding against loans to corporates and households. The package is complementary to other measures recently announced by the ECB, including additional longer-term refinancing operations (LTROs) and the Pandemic Emergency Purchase Programme (PEPP).
Measures worth more than EUR 500bn were agreed at the Eurogroup meeting April 9. These include the EIB Guarantee Fund for EU businesses, the European instrument for temporary support to mitigate unemployment risks in an wmergency (SURE) and the ESM window based on the precautionary credit line (ECCL). Further work on a Recovery Fund was also set2.
The United States made its first steps toward the implementation of a USD 2 trillion package. The Small Business Administration (SBA) launched a range of new guarantee programmes for businesses affected by COVID-19 outbreak. These include loans designed to provide a direct incentive for small businesses to keep their workers on the payroll, loan advances up to USD 10,000 of economic relief for companies that are experiencing temporary difficulties, bridge loans for existing SBA clients, and debt relief. To support the SBA initiatives, the Federal Reserve will establish a facility to provide term financing backed by SBA-supported loans.
1.See https://www.ecb.europa.eu/press/pr/date/2020/html/ecb.pr200407~2472a8ccda.en.html, for more details.
2.See also https://www.consilium.europa.eu/media/43300/200410_peg-centeno-letter-to-pec-michel_covid.pdf, https://www.esm.europa.eu/press-releases/klaus-regling-european-response-corona-crisis, https://www.eib.org/en/press/news/eib-group-welcomes-eurogroup-agreement-for-joint-eu-response-covid-19.htm and https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/eu-financial-assistance/loan-programmes/sure_en for more details.
Financial market sentiment improved somewhat this week. Improvement in equity markets was primarily driven by mainly positive news regarding the virus transmission rates in the most affected economies. Similarly, a (temporary) decline in volatility indexes was observed as sovereign risk premiums mainly contracted in the EU and EM and currencies of emerging economies strengthened (Figure 8). That said, stock market volatility remained above end-February levels when the financial market turbulence took off. Further, the OPEC and G20 meeting of energy ministers provided some cautious optimism regarding the oil price developments.
The EU economy will most likely shrink two-to-three times more than during the 2008 global financial crisis, according to the vast majority of currently available forecasts. It is therefore paramount that the policy response be big enough to counteract the massive economic shock caused by COVID-19.
In an interconnected EU economy, policy measures at the EU level will support economic activity in all Member States in a mutually reinforcing way.
COVID-19 is an unprecedented shock also in the way in which it is affecting our behaviours. Even when the worse of the crisis is over, demand for some services and non-durable consumption goods will only very gradually recover. Long-term impacts, calling for long-term responses, structural changes and investments, seem unavoidable. While fighting the fire, policies for the medium to long term need to be carefully and pre-emptively designed.