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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


    EU economy – The European Commission expects the EU economy to shrink by 7.4% in 2020 and grow by around 6.1% in 2021, highlighting that risks to the baseline scenario are tilted to the downside. The magnitude of the projected recession varies significantly across EU countries (from -4.3% in Poland to -9.7% in Greece), and so does the strength of the rebound in 2021. Unemployment and public debt are also expected to increase substantially. Unemployment in the European Union is forecast to rise from 6.7% in 2019 to 9% in 2020 and then fall to around 8% in 2021. Public debt – on a declining trend since 2014 – is also set to rise, from 79.4% of GDP on average in 2019 to around 95% in 2020. It is expected at 196.4% of GDP in Greece this year, 158.9% in Italy, 131.6% in Portugal, followed by France (116.5%), Cyprus (115.7%), Spain (115.6%) and Belgium (113.8%).

    This severe recession forecast is backed by data releases of retail trade, industrial production, electricity and mobility. The volume of both retail trade and industrial production in the European Union dropped by an unprecedented 10.4% in March compared to February, by far the largest contraction since the series began. On the positive side, high-frequency indicators, such as electricity usage and mobility, are improving in recent weeks but remain depressed overall.

    Exit strategies across the European Union – Member states have gradually started to ease restrictions on economic activity and public life as the spread of the pandemic eases, and the economic costs of the lockdown rise. While it is still too early to compare the economic costs of different confinement strategies, it is clear that the exit is going to take months rather than weeks. Consumption and investment are unlikely to revert to pre-COVID patterns in the near term, also due to enormous uncertainty regarding the evolution of the pandemic in the coming months. For this reason, strategies to boost economic recovery in the medium-term remain crucial.

    1. Latest economic developments

    The economic outlook for this year remains gloomy and subject to severe downside risks. The spring 2020 economic forecast by the European Commission projects that the EU economy will contract by 7.4% in 2020 and grow by around 6.1% in 2021. Growth projections have been revised down by around 9 percentage points compared to the autumn 2019 forecast. While, according to the Commission, the COVID-19 shock is symmetric, both the drop in output in 2020 (from -4.3% in Poland to -9.7% in Greece – Figure 1) and the strength of the rebound in 2021 are set to differ markedly across member states. This is also the case with  unemployment, which is forecast to rise from 6.7% in 2019 to 9% on average in 2020 before falling to around 8% in 2021. Unemployment is expected to rise to almost 20% in Greece, and only marginally in Germany (Figure 1). IMF announced that it would release a downward revision of its World Economic Outlook in June, as the lack of immediate medical solutions may generate more adverse scenarios for some countries. “With the crisis still spreading, the outlook is worse than our already pessimistic projection”, said Kristalina Georgieva, IMF managing director. The IMF predicts a 3% contraction in global output.

    >@European Commission
    © European Commission

    According to the European Commission’s forecasts, public finances will be hit severely, with general government debt jumping in the European Union1 from 79.4% in 2019 to around 95% of GDP in 2020 before decreasing to 92% in 2021. The jump is due both to the decline in GDP and to the massive increase in deficit (from 0.6% to 8.3% on average). Country heterogeneity is relevant: public debt is expected 196.4% of GDP in Greece this year, 158.9% in Italy, 131.6% in Portugal, followed by France (116.5%), Cyprus (115.7%), Spain (115.6%) and Belgium (113.8%). While financing conditions generally remain favourable across EU for sovereigns compared to the 2010-2012 sovereign debt crisis, the path and pace of the recovery are crucial in preserving debt sustainability, particularly for countries with a low growth track record (Figure 2).

    >@European Commission
    © European Commission

    A severe recession this year is also confirmed by recent data releases for retail trade and industrial production. The volume of both retail trade and industrial production in the European Union dropped by an unprecedented 10.4% in March compared to February (Figure 3). This is by far the largest contraction since the series began. Retail trade dropped despite the increase in food and drink sales, where spending rose by 4.7%. Excluding this component, sales volumes fell by 21.3%, driven by a 40% drop in spending for clothing and footwear. Among Euro area economies, France recorded the steepest fall in retail sales, (-17%), followed by Luxembourg (-16%), Austria (-15%) and Spain (-14%)2. In Germany, the contraction was much more contained (-5.6%). Turning to industrial production, in March it plummeted by 10.4% in the European Union (Figure 3). The largest decreases took place in Luxembourg (-32.7%), Italy (-28.4%), Slovakia (-20.3%) and France (-16.4%). Production of durable consumer goods declined most significantly, by 23.8%, followed by capital goods (15.1%), intermediate goods (9.9%), energy (3.5%) and non-durable consumer goods (1.2%).

    >@Eurostat and ECON calculations
    © Eurostat and ECON calculations

    On a positive note, measures of mobility and electricity usage suggest some tentative signs of recovery, albeit at low levels. The electricity demand in the four largest EU economies during peak hours (8-18) of working days has been rising since March, mainly in Italy, but also in the other Germany, France and Spain. Demand in the last two available days (11-12 of May) is higher by 1.1%, 7.7%, 10.7%, 2.0%, respectively, in Germany, France, Italy and Spain compared to the week of 20-24 April. However, these levels are still 10.6%, 30.8%, 20.4% and 19.3% lower, respectively, than in the first week of March, when no containment measures had yet been implemented except in Italy (Figure 4). The slight rebound in economic activity is also confirmed by Apple’s mobility trends. Route requests on Apple maps in the first days of May (up to 10/05) show a marked increase relative to the week of 20-24 April: by seven percentage points for France and Germany, nine percentage points for Spain and 14 percentage points for Italy. In both weeks, however, route requests were considerably much lower than those requested before the introduction of confinement measures.

    >@ENTSO-E and EIB

    1. See Eurostat definitions for compilation of EU aggregates.

    2. Data were not reported for Italy.

    2. Exit strategies across the EU

    EU countries have started to ease restrictions on economic activity and public life. By mid-March, most member states had entered a “confinement stage”: measures were put in place to limit the spread of the Coronavirus, including closures of schools/daycare services, restaurants and non-essential shops, restrictions on other economic activities, public gatherings and mobility within and across countries. By mid-May, most EU countries had managed to flatten the curve and began easing the measures.

    Confinement strategies have varied in intensity, but all member states are gradually relaxing them. Italy has seen the strictest and lengthiest lockdown, starting already in early March and including severe limits on mobility, contacts and economic activity. Most other member states had followed suit and imposed containment measures by mid-March, albeit in varying degrees of severity. In terms of strictness, France, Austria, Denmark and several Central and Eastern European member states (Poland, Romania, Hungary, Bulgaria and Croatia), relied on a more rigid approach. On the other end of the spectrum are Estonia, Latvia and Sweden, with relatively lighter measures and relying more on voluntary restrictions. Variations in confinement strategies reflect both the actual occurrence of the virus as well as capacities to deal with a potential worsening of the outbreak. While measures are now being lifted, the process is going to be gradual, with some variation persisting across EU countries (Figure 5).

    >@IHS Markit and ECON calculations
    © IHS Markit and ECON calculations

    It is still too early to compare the economic costs of different confinement strategies. Real-time data sources gave some early indication, and first quarter GDP figures indicate a significant impact on economic activity mostly during March3.For instance, the GDP in Germany shrank by 2.2% quarter on quarter, the largest decrease since 2007/8 and the second-largest since reunification. Some confinement measures, such as the complete stop of non-essential manufacturing in Italy, are likely to have taken a greater toll on economic activity than others, yet details matter. For instance, construction activities, accounting for some 5% of economic activity, stopped for some weeks in certain countries but continued in others (albeit sometimes at a reduced pace)4.Restrictions for restaurants still allowed for take-away operations in some countries, but the extent to which operations continued depended on local demand and labour supply and was partly determined by other confinement measures, including childcare and public transport availability.

    The strictness of confinement measures, linkages and local economic structures affect economic costs. Countries and regions with higher shares of jobs that can be done from home, reflecting occupational composition and availability of digital infrastructure, stand to see less impact from confinement,  all else being equal. Also, confinement strategies in other places have repercussions on local economic activities, via frictions in value chains and limited mobility, causing production to severely slow or stop. Border regions in Europe, often with close ties, and regions where more economic activity is linked to trade, e.g. via ports or air travel, stand to see deeper effects. For example, the latest survey results for Germany indicate that the regions of Bavaria and Baden-Wuerttemberg, traditional strongholds of car production and sensitive to global linkages, have the highest shares of firms that reported job cuts as a result of the Coronavirus crisis5.

    Some structural features appear to add to local economic resilience and cushion immediate local labour market impact. Concerns about unemployment increased across Europe with the spread of the pandemic, showing in real-time data before the effects on labour markets fully materialised. Analysing data based on Google searches suggests that some structural characteristics of local economies might mitigate immediate concerns about unemployment. In regions with more employment in high tech sectors, higher internet use and a better-educated workforce, concerns about unemployment tended to increase less with the spread of COVID-19 (Figure 6). These differences reflect, to some extent, possibilities to continue to work and keep up economic operations via digital channels: this mitigates fears of unemployment, also because more economic activity can continue.

    >@ECON calculations
    © ECON calculations

    Exit is going to be a gradual process over months. While a few member states had already started easing some measures after Easter (Austria, Slovakia), most began only more recently, taking their first steps towards the end of April/early May. Across the EU, confinement was strictest around 2 March to mid-April on average. By now, all member states that had imposed lockdown measures have started to ease them6. However, the easing is going to be a gradual process and will extend beyond early summer. Many measures will remain in place for weeks or months. Restrictions likely to stay in place for the longest period include the ban on events and gatherings involving large crowds.

    Restrictions on travel are only being lifted slowly. Most exit strategies have started with a local focus, allowing shop openings and lifting some restrictions on movement. However, limitations on travel within and across countries are only slowly being lifted. As a consequence, the impact on tourism and hospitality services will be more prolonged, with particular risks for countries and regions more reliant on tourism activities. Croatia, Cyprus, Portugal, Greece or Malta stand to be particularly sensitive to lifting travel restrictions. With regards to external borders, the Commission has invited member states to prolong closures at least until June 15 for non-EEA nationals and emphasised the need to prioritise the gradual and coordinated lifting of internal EU borders7.For intra-EU borders, several member states still maintain restrictions. On 15 May 2020, the European Commission unveiled guidelines and recommendations to support member states on the lifting of travel restrictions and options for tourism businesses to reopen while respecting health precautions. They include, among others,  a proposal for a common approach to restoring free movement and lifting restrictions at EU internal borders in a gradual and coordinated way, a framework to support the re-establishment of transport, and criteria for restoring tourism activities safely and gradually.

    Given the slower pace to which the virus spreads, blanket restrictions should be replaced by more targeted measures, taking into account differences depending on local situations, and maintaining some flexibility to reflect epidemiological developments. As basic principles, member states should act based on the evolution of the pandemic, their ability to introduce transportation safety measures,  and taking into account economic and social considerations, including prioritising cross border movements in key areas of activity and for personal reasons. Principles should be applied in a non-discriminatory manner8.Safety measures when using air, road, rail and water transports must be introduced to allow the gradual re-establishment of connections. Restrictions could be lifted first for transport modes and tourism activities for which safety measures are easier to implement.

    Consumption is unlikely to revert back to pre-COVID patterns immediately. Uncertainties about the resumption and continuation of economic activity in the recovery phase remain elevated. Prospects for consumption remain subdued, reflecting a gradual phasing out for some measures, consumers’ concerns about infection risks and lower income expectations. Survey data from April reveals that households in the European Union expect a steep decline in the general economic situation, a deterioration of their finances, and a sharp increase in unemployment. This points towards a propensity to increase precautionary savings and lower aggregate demand (Figure 7). While member states have taken measures to support household incomes, with short-term work schemes being the most important ones, mitigating a sustained impact on the labour market will be crucial during the exit phase.

    >@European Commission and ECON calculations
    © European Commission and ECON calculations

    Elevated uncertainty will persist over the next months. First, it is still unclear whether and how the deconfinement steps will affect the spread of the virus. There is a non-negligible risk of a second wave of infections once measures are partially lifted. Regional spikes of COVID-19 infections after easing of confinement have been observed in China, South Korea and Germany. If these occur on a larger scale, a partial or full reversal of the easing measures may be necessary, at additional economic costs. Close monitoring may facilitate a faster adapation of measures and the management of local outbreaks, but it will also will require some flexibility for businesses to adapt to changing local conditions. Second, while the number of new cases has been on the decline in the European Union for a few weeks, other parts of the world have not seen yet a flattening of the curve. The number of new cases is still close to its peak in the United States; in some emerging economies – such as Brazil, Russia and Middle Eastern countries - the number of new cases is still increasing. The spread of the virus in other parts of the world will continue to impact on EU economies even while European countries are gradually lifting confinement measures, for example through reduced trade.

    Deconfinement andstrategies to boost economic recovery remain essential. Despite the progressive deconfinement, uncertainty remains high. Hence, measures to support businesses, employment and consumer confidence are going to remain key to facilitate the recovery. Exit strategies and the speed of lifting lockdown measures must reflect the local developments of the pandemic. At the same time, coordinated action at European level, including exchange of information on spare healthcare capacities, support for testing , research to fight the virus and a coordinated approach for restoring Schengen, can facilitate a gradual but predictable deconfinement and contribute to reviving the single market, which has a key role in supporting the economic recovery. Discussions on the EU recovery fund, which should support a forceful economic rebound, are ongoing.

    3. Price, seasonal and calendar adjusted. Destatis.

    4. For example, while confinement strategies of Luxembourg and Germany were similar on many aspects activity stopped for some weeks in Luxembourg but continued in Germany at reduced pace.

    5. The share of companies reporting reduction of employment is 22% in Baden-Wuerttemberg and 20% in Bavaria compared to 18% on average. Ifo Business Survey for April 2020.

    6. Sweden has not formally imposed a lockdown but relied on voluntary social distancing.

    7. Joint Roadmap on lifting containment measures, press release 8 May.

    8. In practice, residents in regions in EU countries with comparable (and relatively good) epidemiological situations would be allowed to move first, and only in a second phase would freedom of movement be restored throughout the whole Schengen area and beyond.

    3. Conclusions

    The declining new infection rates and the gradual reopening of European economies provide some signs that the worst may be behind us. Exit strategies and the pace at which restrictions are lifted should take into account the pandemic outlook. At this time, it is clear that economic activity will remain substantially depressed in the coming months. For economies to return to pre-crisis economic activity levels, providing support to vulnerable groups – whether employees, enterprises or countries - is essential.

    Focusing on the short term will not be enough. Coordinated action at the European level, such as jointly responding to the health challenges facing Europe, restoring Schengen and finalising the agreed EU-wide policy measures, can improve medium and long-term prospects. Reviving and deepening the single market and tackling climate issues will also be crucial to guarantee a level playing field and bring about prosperity in Europe.