Ludovic Subran, Euler Hermes Economist and Solunion Board Director
It is such a complex and unpredictable phenomenon we are facing, making analysis and projection a real challenge. In addition to the economic impact of the lockdowns to try to slow the spread of COVID-19, there are uncertainties regarding the new normal we are heading toward, in which new patterns of individual and corporate consumption and organization will shape a new economic outlook.
The world economy has been greatly affected. The lockdown of more than half the population and supply chains blockages have pushed it into its worst recession since the Second World War (our estimates point to negative growth of -3.3 percent this year). Losses from sales could amount to 3.5 trillion dollars in 2020, and insolvencies are expected to increase by about 20 percent.
Governments will have to work hard to weather this storm, which threatens one-third of jobs that are affected by ERTEs (Expediente de Regulación Temporal de Empleo — temporary layoffs). Although we are faced with a global phenomenon, regional outlooks point to divergent paths between the United States and Europe.
The US labor market is expected to show better resistance due to its flexibility, and with an expected unemployment rate of 9.4 percent this year. In the eurozone, an estimated 70 million people are expected to be affected by partial unemployment. The very gradual reopening of the various economies will push companies to reduce their fixed costs, especially in sectors such as hospitality, tourism or retail sales, where coming out of lockdown will take longer. As a result, the unemployment rate in the eurozone is expected to increase 2pp to 9.5 percent in 2020.
We estimate that eurozone GDP growth will fall sharply in the first half of 2020 (by between 4 percent and 8 percent quarter-on-quarter in the first quarter, and between 10 percent and 20 percent quarter-on-quarter in the second quarter, depending on the country).
For Latin America, the recession seems inevitable. The region is exposed to the impact of Chinese trading and commodity prices, oil prices, and lockdown measures on virtually all economies. Overall, we expect a contraction of close to 4.1 percent in 2020 in our U-shaped reference scenario, and of 8 percent in the event of a prolonged crisis. The most at-risk markets are oil exporters, tourism destinations and low-revenue Central American countries.
Returning to the global economy, the gradual easing of lockdown measures in several countries since the beginning of May will provide a boost from the second half of the year. However, the plans announced suggest that protective measures (mandatory masks, social distancing, prolonged bans on events, and selective isolation) will remain in place for several months to minimize the risk of a further increase in infections. Most economies will operate at 70 or 80 percent of their potential for at least two or three quarters. In addition, there are several factors that could trigger a prolonged crisis, rather than a U-shaped recovery.
We need adaptive policies that help repair and recover. Double-digit fiscal deficits, the additional debt burden, and central bank balance sheets (50 percent of GDP for the Fed and the ECB) have helped to mitigate the financial, economic, and social costs of the crisis, but they are not enough.
It will take the eurozone’s economy a year to recover to pre-crisis levels. The internal impact accounts for 30 to 40 percent in countries where lockdown is very strict, such as in Spain, Italy, France, and the United Kingdom. It therefore seems that we will have to wait until early 2021 for the eurozone’s GDP to recover to its pre-COVID-19 crisis levels. What is more, the recovery process could extend to mid-2021 in some countries, especially those whose economies are heavily reliant on tourism and the services sector.
In the medium-term, this unprecedented crisis will change the rules of the game that have prevailed so far. In the political sphere, the role of the State has been strengthened. We can therefore expect more government intervention, expanding the coverage of basic needs, especially in healthcare. The situation will test governments’ abilities to cope with the storm, and rivalries between different state models (i.e. more democratic or authoritarian) might emerge in its management. Moreover, there is a risk that it will become politicized by the collapse of the economy, as we are already seeing.
The phenomenon has also called into question trade relations between markets. Countries will try to reduce their dependence on others, especially in the supply of strategic goods. Companies will also look to shorten their supply chains.
Risk will be a key factor for investors and companies. Confidence in financial markets has faltered and investors are expected to rely on more defensive strategies. Companies will increase demand for risk coverage.
Finally, this new normality is shaping the way we work. Company structures will be flexible, work travel will be reduced, and remote working will prevail.
A new horizon where risk management and forecasting will be critical.