Money Buzz! Europa

Tag: economy

  • PwC: The global economy is projected to rebound by early 2022

    PwC: The global economy is projected to rebound by early 2022

    The global economy is projected to grow in 2021 by around 5%, the fastest rate recorded in the 21st century, returning the global economy in aggregate to pre-pandemic levels of output by the end of 2021 or early 2022, according to PwC Global Economic Watch 2021.

    While the global economy is likely to be back to its pre-crisis levels, the rebound will be uneven across different countries, sectors and income levels.

    Growth will be contingent on a successful and speedy deployment of vaccines and continued accommodative fiscal, monetary and financial conditions in each country.

    Growth will return but be uneven

    According to PwC, the Chinese economy is already bigger than its pre-pandemic size, but other advanced economies, particularly heavily service based economies like the UK, France and Spain or those focused on exporting capital goods, such as Germany and Japan, are unlikely to recover to their pre-crisis levels by the end of 2021.

    The predictions caution that the next three-to-six months will continue to be challenging, particularly for the Northern Hemisphere countries going through the winter months as they could be forced to further localised or full economy-wide lockdowns, as recently displayed in the UK and Germany.

    So, these economies could contract in Q1 and growth overall is more likely to pick up in the second half of the year, when it is expected that at least two thirds of their population will be vaccinated.

    In economies such as the UK, France, Spain and Germany, growing but lower levels of output are projected to push up unemployment rates, with most of the jobs affected likely to be those at the bottom end of the earnings distribution, thus exacerbating income inequalities.

    More investments in green infrastructure

    The environment will be an important focus for 2021, significant investment and policy shifts related to the Paris Climate Agreement being expected in the major trading blocks including the US, China and the EU.

    In this context, global green bond issuance is expected to top USD 500 billion for the first time with investor appetite expected to continue to increase in Environmental, Social and Governance (ESG) funds.

    ESG funds will continue to increase and could account for up to 57% of total European mutual funds by 2025. Green bonds, which are used to directly finance environmental projects, currently make up less than 5% of the global fixed income market.

    Other forecasts for 2021

    In the previous edition of the Global Economic Watch, the Netherlands was credited with the best chance of winning the Euro 2020 championship, which due to the pandemic was postponed to 2021.

    Meanwhile, the form of the Dutch team has decreased and France now has the best chance to win.

    Annual average oil price to remain below USD60 per barrel but likely to pick in the second half of the year.

    Italy is expected to re-join the USD 2 trillion GDP club as public debt levels in G7 are projected to exceed USD 57 trillion.

  • The implications of COVID-19 for the Romanian financial system

    The implications of COVID-19 for the Romanian financial system

    Leonardo Badea, Deputy Governor of the Romanian National Bank, talked with Money Buzz! Europa about the implications of COVID-19 for the Romanian financial system.

    Mr. Badea says: ”The pandemic has affected the whole world and has already produced important changes in the economy. Almost all the systems and mechanisms by which economic activities were carried out so far are subjected to an extremely harsh test. The year 2021 promises to be just as difficult, at least during the first half, and the financial system might show some effects of deterioration of the quality of the loan portfolio. For the economy, the negative pressure will last probably for at least another 1-2 quarters, until through the efforts of the medical world and of the health system it will be possible to implement on a sufficiently large scale the measures to reduce the risk of disease.

    Undoubtedly the positive developments during the last month regarding the proven efficacy in clinical trials of several vaccines give us hope to finally get out of this crisis, to a new normalcy. However, it will take time for the economy to find its new equilibrium from which to start a new growth cycle.

    The COVID-19 pandemic had a number of immediate effects on the Romanian financial sector that were and continue to be adequately managed:

    • Operationally, the closure activities and the limitation of traffic (people and goods) have significantly affected the financial sector, like in many sectors of the economy, but not with the high intensity felt by the hospitality industry or airlines, and the necessary solutions for continuity were found and implemented (with great efforts).
    • The rapid intervention of the authorities (government, central bank, etc.) led to the avoidance of the liquidity crisis that could have been generated by these blockages both in the economy and in the financial system.

    From the perspective of the measures implemented by the National Bank of Romania (NBR) in the context of the COVID-19 crisis, the first ones chronologically were focused on payment and settlement systems. Given the rapid spreading of the negative effects of the pandemic, the NBR reacted promptly to provide credit institutions with the liquidity needed to accommodate both standard operations and the demand of bank customers for cash withdrawals. NBR provided banks uninterrupted liquidity for all transactions, including cash for ATMs. In the same context, NBR and the European Central Bank (ECB) signed an agreement that enables NBR, if necessary, to provide liquidity in euro for the local banks, through a repo line with the ECB.

    These measures on settlement and payment systems have been accompanied in the monetary policy plan by actions aimed at strengthening liquidity in the banking system and ensuring the proper functioning of the money market.

    The liquidity shock generated by the start of the COVID-19 pandemic in March 2020 was well managed by the banking sector. After a strong reaction in March, when the credit institutions needed to withdrawal important amounts of cash from the NBR to meet demand by population and businesses, during the following period the sources of bank financing from the non-governmental sector have increased, which shows that the balance was quickly restored.

    From a financial point of view, the impact of the pandemic crisis on the financial system has so far not been as visible as it has been felt in the economy, although some signs have been seen in the second and third quarters. Government measures to protect debtors affected by the pandemic and the easing of micro- and macro-prudential regulations have delayed this impact. Given that the share of loans held by the borrowers who have resorted to rate deferral facilities (based on the legislative moratorium and / or private moratoriums adopted by credit institutions) is at a level that cannot be neglected, the effect on the banking sector might become more visible after the expiration of the effects of the moratorium if the financial position of these borrowers will not allow them to resume payment of instalments.

    It is difficult to imagine that in an economic crisis of such proportions and which generates long-term structural changes, the financial system will not share some of the losses. Therefore, it is likely that we will see this at some point over the next year. Hence, creditors should initiate in advance the process of assessing the ability of borrowers to repay their loans after the expiry of moratoriums in order to identify problems and think of constructive and equitable solutions.

    The COVID-19 pandemic began at a time when the Romanian banking sector had a good risk resilience arising from the important capital consolidation in recent years, improved asset quality and a more liquid balance sheet structure. The increase in own funds available for loss absorption, the settlement of a significant part of the balance of non-performing loans and the consistent presence in the balance sheet of highly liquid assets (mainly government securities and exposures to the central bank) are other elements that contributed to strengthening the position of credit institutions.

    As of September 2020, the main health indicators of the Romanian banking sector were generally at better values ​​than those recorded in EU Member States. A significant proportion of the profit recorded in 2019 was retained and contributed to the improvement of solvency. As of September 2020, six months after the shock induced by COVID-19, the financial strength indicators of the banking sector are adequate:

    • total degree of capitalization: 22.8 percent (June 2020) (+3.1 pp annually).        
    • coverage with liquidity of 283.7 percent (September 2020) (+59.7 pp annually).        

    The non-performing loans ratio (4.1 percent, September 2020) re-entered a downward trend and the provisioning rate for non-performing loans (63.4 percent, September 2020) continued to place the banking sector in a more favourable position compared to the European average. The future evolution of the non-performing loans rate will depend on the speed of recovery as well as on the timing and manner of withdrawal of government support schemes.

    Among the factors that could mitigate the adverse effects of the crisis on the banking sector in Romania is the fact that before the onset of the pandemic companies with bank loans (at aggregated level) were in better financial health than the average recorded for the whole non-financial corporations sector. Even the companies that resorted to the suspension of rates payment had previously (at the end of 2019), on average, financial health indicators that placed them outside the risk area. Moreover, the resilience of the population sector has improved considerably compared to the situation before the global financial crisis. During the 12 months period before the outbreak of the pandemic, its net worth increased (by 11%) on both important components: in terms of real estate assets and in holdings of financial assets, the latter giving a higher degree of liquidity available for unforeseen situations.

    The profitability of the banking sector for the first nine months remained below the level recorded in the similar period of the previous year, a decrease that can be considered normal given the circumstances and which does not cause problems on financial stability.

    During this period, the Romanian banking system faces a threefold challenge:

    (1)   To support the flow of credit under the new macroeconomic conditions characterized by vulnerabilities and uncertainties ;  

    (2)   To manage the growing financial risks and to maintain its robustness ;  

    (3)   To adapt its activity to the new constraints generated by the need of a secure environment for employees and customers, but also in the context of the desire to improve operational efficiency and increase the degree of digitization.

    From this perspective, the pandemic crisis is more than just a test of the robustness of the system, for which, as we have seen, banks are well prepared. It is also a challenge to fulfil as well as possible its vital role in the economy.

    The crisis we are going through has already shown, more than the previous crises, the need to improve the structure of the economy by increasing the activities to protect the environment, implement and support technological innovations (especially in the digital field), increase inclusion and reduce inequalities. I believe that none of these objectives can be optimally achieved without the involvement of banks in providing at least a substantial part of the necessary funding”.

  • Austrian economy dropped by 12.1% in the second quarter of 2020

    Austrian economy dropped by 12.1% in the second quarter of 2020

    The Austrian gross domestic product (GDP) dropped by 12.1% in volume terms during the second quarter of 2020 compared to the first quarter of 2020 and by 14.3% compared to the second quarter of 2019, according to Statistics Austria.

    In 2019, the Austrian economy grew by 1.4%, which means a slowdown in growth dynamics compared to the previous years (2017: +2.4%; 2018: +2.6%).

    Private consumption declined by 12.6% in volume terms compared to the previous quarter (-16.1% compared to Q2/2019), mainly due to the lockdown of leisure services (accommodation, food service, arts and entertainment).

    Consumption of housing (rents, electricity) and food/beverages grew slightly.

    The COVID-19 measures also left their mark in the service sector, with accommodation and food services being most affected.

    They recorded a decline of 65.2% in volume terms compared to the first quarter of 2020 (-61.1% compared to Q2/2019). As expected, arts, entertainment and recreation also suffered losses (-27.0% in volume terms compared to Q1/2020; -35.3% compared to Q2/2019).

    In total, each economic activity recorded negative volume growth in the second quarter of 2020 compared to the first quarter in 2020.

    Real estate activities (-0.7% in volume terms compared to Q1/2020; +2.2% compared to Q2/2019), health and public administration (-0.5% in volume terms compared to Q1/2020; -0.6% compared to Q2/2019) as well as information and communication (-1.3% in volume terms compared to Q1/2020; +1.1% compared to Q2/2019) were hardly affected.

    Similar to the development of foreign trade, manufacturing already slowed down in 2019. The lockdown then led to another remarkable slump by 15.6% in terms of volume compared to the first quarter of 2020 (-18.4% compared to Q2/2019).

  • How Covid-19 crisis will impact economies in Italy and Spain

    How Covid-19 crisis will impact economies in Italy and Spain

    According to Coface forecasts, Spain and Italy will be among the economies hardest hit by COVID-19, contracting by 12.8% and 13.6% respectively in 2020.

    Corporate insolvencies are expected to increase by 22% in Spain and 37% in Italy by 2021, relative to 2019 levels.

    For 2021, Coface forecasts that Spain and Italy’s GDP will rebound by 10.2% and 8.9%, leaving the economies 3.9% and 5.9% below 2019 levels.

    Higher prevalence of vulnerable enterprises in Italy with the spectre of zombie firms

    In order to assess the potential impact of this GDP contraction on company balance sheets, Coface ran simulations on the evolution of corporate solvency, using data from the Spanish and Italian central banks that accounts for differences across sectors and firm sizes.

    Even though interest rates are extremely low, corporate over-indebtedness is associated with depressed private investment. As a result, the COVID-19 crisis could exert durable downward pressure on a country’s growth potential, accelerating the “Japanization” of the eurozone.

    With this in mind, the balance sheets of Spanish and Italian companies should be analysed more closely. Examining the distribution of debt and liquidity in the corporate sector in Southern Europe should help to identify pockets of vulnerability.

    The current financial situation of companies in Spain and Italy is healthier than on the eve of the 2009 global financial crisis.

    Since then, Spanish companies have managed to significantly reduce their debt by 20 percentage points, reaching 37% of their assets in the third quarter of 2019.

    Italian companies have also improved their financial situation since the 59% peak in Q4 2011, albeit to a lesser degree. With a debt ratio of 50%, businesses in Italy are now the most indebted among the major European economies.

    The growing mismatch between financing and investment can be indicative of a high prevalence of “zombie” firms in Italy – companies steeped in debt that will not be able to sowing the seeds of future growth.

    Sectors at risk: automotive, construction, and retail

    Coface expects the vulnerability of firms to differ according to their sectors and size, not only in terms of the intensity of the shocks, but also given the pre-coronavirus fragility of their balance sheets.

    The major car manufacturers could be in difficulty because of their habit of keeping little liquidity: at the end of 2018, cash reserves as a percentage of sales were only 2.7% in Italy and 0.5% in Spain.

    As for the retail and construction sectors, with high leverage and low projected interest coverage rates, they appear particularly vulnerable, as do Italy’s small textile manufacturers.

    Coface observes a higher prevalence of potentially vulnerable companies in Italy. In most cases, this can be explained by lower initial cash flow, lower profitability, and slightly slower cost adjustments.

    In this context, many companies would survive only at the cost of substantially higher levels of debt.

  • Political and environmental risks are the main threats for businesses in 2020

    Political and environmental risks are the main threats for businesses in 2020

    As Coface launched the 2020 edition of its Country & Sector Risks Handbook, Chief Economist Julien Marcilly presented the main threats for the global economy in 2020.

    The US-China trade agreement will not be enough to rekindle international trade

    With 2019 being marked by a rise in protectionist rhetoric (more than 1,000 measures implemented worldwide) and the first decline of global trade in ten years, Coface anticipates that international trade will grow by only 0.8% in 2020.

    The truce trade agreement between the United States and China is unlikely to restore corporate confidence or significantly boost industry and world trade, especially as only 23% of the protectionist measures taken between 2017 and 2019 affect the United States or China. The rise in protectionism is therefore a global and lasting trend that to which companies will need to adapt.

    Global growth, which already shrunk by 0.75pp last year due to these trade uncertainties, is not expected to recover this year: 2.4% after 2.5% in 2019. Coface expects corporate insolvencies to increase in 80% of the countries for which forecasts are issued this year, including United States (+3% in 2020), the United Kingdom (+3% in 2020, after a cumulative increase of 17% since the June 2016 referendum), Germany (+2%) and France (+1%). Overall, Coface anticipates a 2% increase in insolvencies worldwide, in line with 2019.

    Sectors: metals suffering; construction in good shape

    Uncertainties related to the protectionist environment also contribute to the volatility of commodity prices, particularly those of agriculture, metals, and oil. Steel prices will continue to fall over the next six months, penalizing companies in the sector, especially as growth in China – which accounts for half of global steel demand – is expected to reach only 5.8% this year. Therefore, the metals sector risk assessment has been downgraded in 5 countries, including the United States and Italy.

    Moreover, the sustained low level of oil prices, despite geopolitical uncertainties (USD 60 per barrel of Brent on average in 2020 after USD 64 in 2019) will hurt some indebted producers, notably in the United States.

    On the bright side, the construction sector is benefiting from highly expansionist monetary policies: its assessment has been upgraded in 4 countries (including Brazil and Turkey). In total, Coface downgraded 22 and upgraded 8 sector assessments this quarter, reflecting the significant increase in risks for the economy.

    In 2020, companies will mainly face non-economic risks

    The end of 2019 saw an increase in social tension “trouble spots” around the world, with varying levels of intensity. This underlying trend was strongly anticipated by the Coface Political Risk Index, published at the beginning of 2019 and at an all-time high.

    In 2020, this indicator forecasts a high level of social risk in several countries in Africa, the Middle East, Central Asia, and even Russia.

    Since 2019, social discontent has also manifested in increasing demands for environmental protection. Environmental risks have a wide range of effects on corporate credit: greater frequency of physical risks (natural disasters arising from climate change), but also transition risks (new and more stringent regulations, changes in consumer standards).

    For the latter, the effects of stricter anti-pollution regulations for the automotive sector in India or in global shipping must be monitored this year. Coface pays close attention to the analysis of these two categories of environmental risk.

    Emerging economies: sovereign risk is back in the spotlight

    Growth in emerging economies should accelerate slightly this year (3.9% versus 3.5% in 2019). However, public debt has reached a historically high level for these countries and is increasing in all regions except Central and Eastern Europe.

    In Latin America, the level of indebtedness is higher than at the end of the 1990s, which was a period marked by recurrent debt crises. In Africa, public debt is close to the level observed around fifteen years ago: a period of debt write-offs by international and bilateral donors. For companies in these regions, this means that government and large State-Owned Enterprises (SOE) arrears are likely to increase this year. The only good news is that the structure of emerging countries’ sovereign debt is generally more favourable than twenty years ago, since 80% of it is now denominated in local currency.

    In this delicate and volatile environment where economies are facing headwinds, 4 country assessments have been downgraded (Colombia, Chile, Burkina Faso and Guinea), while 6 have been upgraded (Turkey, Senegal, Madagascar, Nepal, Maldives and Paraguay).

  • Economic outlook deteriorates worldwide

    Economic development is expected to deteriorate significantly from +32% currently to -5% worldwide MoneyBuzz! learned from Statista’s  „Global Economic Outlook (GEO) Score” new quarterly report. 

    Measured on a scale from -100% and +100%, the global score reflecting the current economic situation, Q3 2019, is still positive with +32%. However, when discussing the next six months, it drops to -5% worldwide.

    The highest regional current satisfaction score is in the Americas at +44% and the lowest is in Europe at +15%. The score for the expected development within the next six months lowers globally. Overall, the most negative estimation for the future is found in Europe with -22% and the most positive is in Asia with +6%. 

    The country-specific findings highlight this general switch to concern about the future economic situation but vary depending on the respective nation: In the US, a score of +58% for the current economic situation is quite positive, but it deteriorates heavily to -11% when considering the economic development for the next six months. 

    In a similar pattern, Germany’s outlook drops from a current score of +69% to -35%. 

    In the UK, a negative present satisfaction score of -34% goes from very bad to even worse with -54%. 

    Things are different in Italy where the current situation is estimated negatively at -44% but the outlook is +8%, showing an expected improvement over the next six months.