Economic consequences and Policy Responses of the pandemic in Europe Alvaro Pereira 14 May 2020
Key messages The shocks of the pandemic and confinement measures vary across countries • The pandemic is more severe in some countries • The strictness of confinement measures varies The impact of the shutdown on the economy will be large and governments are already providing significant policy support • Estimates of the initial impact vary with sector specialisation and confinement level • Responses of policy support are far more uniform • Level of direct and indirect fiscal support conditional on fiscal space The Covid-19 crisis is creating a liquidity shock • The lockdown is affecting firms’ liquidity positions, even with public support • A key policy challenge will be to address liquidity issues as confinement is lifted
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Restrictions vary across OECD and G20 countries Confinement and lockdowns
Shutdown of economic activity
Share of OECD and G20 countries
Share of OECD and G20 countries
Note: Data as of 28 April. RHS: Data available for 40 OECD and G20 countries only. Source: OECD Covid-19 Policy tracker.
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4
Euro area PMI indices have plunged PMI indices 70
70
60
60
50
50
40
40
30
30
Manufacturing PMI
Services PMI
20
20
10
10
0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
0
The impact of the shutdown will be large Projected decline in GDP % decline in GDP from 2019Q4 to 2020Q2 0
ITA
ESP
FRA
GBR EA17
DEU
TUR
AUS
SAU
RUS
CAN
BRA
IND
MEX
ARG
USA
JPN
ZAF
IDN
KOR
-5
numa manhã de domingo -10
-15
-20
-25 Note: The OECD STEP projections (single-hit scenario) are preliminary and subject to revision before publication in the June 2020 OECD Economic Outlook. The projections for the first half of 2020 incorporate desks’ judgements about the impact of the shutdown measures implemented in each country, the exit strategies that have been announced and the economic policy measures that have been undertaken. Source: OECD STEP 107 database.
5
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The impact of the lockdown in the Euro Area Potential initial impact of shutdowns on GDP (%) – EA17 countries
GRC
DEU
-35
ESP
-35
AUT
-30
PRT
-30
ITA
-25
NLD
-25
FRA
-20
LVA
-20
LTU
-15
EST
-15
BEL
-10
SVK
-10
SVN
-5
FIN
-5
LUX
0
IRL
0
Firms likely face liquidity shortages in the absence of government intervention Share of firms facing liquidity shortfalls without government intervention Average across 16 European countries
France and Italy
Note: The prolonged confinement scenario envisages a sharp drop in activities in each month considered, being agnostic on the length of the confinement and on the transition to normality. The unimodal scenario foresees a sharp drop in activity lasting two months, followed by a four-month progressive transition towards normality, and a return to pre-crisis activity levels from the seventh month after the start of the epidemic. The bimodal scenario overlaps with the unimodal scenario for the first seven months, but then models a second outbreak from the eighth month onwards. The decline in output is assumed to be: between 50 and 100% in the most severely hit sectors and 15% in the other sectors. The exercise covers 16 European countries: Belgium, Denmark, Estonia, Finland, France, Germany, Hungary, Ireland, Italy, Latvia, Portugal, Romania, Slovenia, Spain, Sweden and the United Kingdom. Source: OECD calculations based on OrbisÂŽ data in Corporate sector vulnerablilities during the Covid-19 outbreak: assessment and policy responses, OECD (forthcoming).
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Economic Forecasting: what to do?
• Extreme uncertainty
• How many scenarios? • How many revisions?
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What’s different about this crisis compared with a typical recession? Typical
Covid-19
Cause of recession Structural, excessive debt build-up, poor investment, policy mistakes
Exogenous to the economy, pandemic
Scope of recession Direct effects largely confined to a group of countries or region with spill-overs, e.g. advanced countries (GFC), emerging Asia (1997-98 Asian Financial Crisis)
Global, almost every country directly affected by the pandemic
Unemployment
Rises steadily with a lag to activity. Policy response largely confined to automatic stabilisers such as existing unemployment benefit programmes. Risk of structural unemployment.
Immediate sharp increase in dismissals and work stand-downs. Massive public support to households and firm incomes to preserve employment and mitigate a vicious circle of falling incomes, lack of demand and dismissals. Some unemployment will be structural e.g. tourism related.
Consumption and Investment
Consumption falls, especially consumer durables Investment declines sharply
Whole categories of consumption not available Supply chain problems Investment halts in some sectors
Finance
Structurally weak firms fail, generating NPLs
Structurally sound firms may fail, generating NPLs, in addition to weak ones
Firms and sectors
Face fall in demand
Face collapse of demand, entire sectors e.g. travel and hospitality may be shut down for a long period. Partial nationalisations could occur.
Trade
Decline in trade
Collapse in demand, supply chain blockages force industry closures
Fiscal policy
Aggregate demand management
Aggregate demand management, infection fighting, disaster relief
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Policy Response in Europe
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Policy response so far: Monetary policy
ECB measures to support bank lending and liquidity: new (non-targeted) longer-term refinancing operations
lower interest rates in targeted longer-term refinancing operations (TLTRO III) collateral easing measures
ECB measures to reinforce asset purchases:
an extra EUR 870 bn of purchases (7.3% of euro area 2019 GDP) until end-2020
of which: EUR 750 bn under the Pandemic Emergency Purchase Programme (PEPP), to which issue and issuer limits do not apply
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Policy response so far: Prudential regulation
Multiple measures to provide temporary capital relief to banks (ECB, Commission, national authorities), e.g.:
banks allowed to operate below the level of capital defined by the Pillar 2 Guidance (P2G), the capital conservation buffer (CCB) and the
liquidity coverage ratio (LCR)
supervisory flexibility regarding the treatment of non-performing loans
reduction in capital requirements for market risk
proposed changes to Capital Requirements Regulation (CRR)
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Policy response so far: Fiscal Policy alleviating constraints on national fiscal policies (Stability and Growth Pact, State aid rules) access to cohesion funding made faster and more flexible (Coronavirus Response Investment Initiative, CRII/CRII+) ESM Pandemic Crisis Support (10-year loans for healthcare spending, 2% of national GDP) SURE proposal (temporary Support to mitigate Unemployment Risks in an Emergency): loans for national short-time work schemes, EUR 100 bn in total (0.7% of EU GDP) Enhanced action by the EIB, esp. a EUR 25 billion guarantee fund, which will support up to EUR
200 billion of financing for companies
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The European response: what else? (I)
 Monetary policy: continue asset purchases beyond end-2020, depart from capital key in cross-country allocation if needed for effectiveness  Dealing with NPLs: setting up an asset management company at European level would help
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The European response: what else? (II)
Fiscal policy: need for a much stronger common response Monetary policy is overburdened (and faces legal risks) In countries lacking fiscal space, national fiscal policies are overburdened: High and rising debt (automatic stabilisers, discretionary stimulus, off-balance
support) Contingent liabilities (e.g. credit guarantees) Rising spreads
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A stronger European fiscal response (I)
Responding to the emergency Loans:
a
strengthened
ESM
(larger
amounts, long maturities, no stigma) Grants, other tools (e.g. equity participation in SMEs): a large European recovery fund, issuing common bonds repaid by the EU budget
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A stronger European fiscal response (II)
Implementing overdue reforms (“never waste a good crisis”) reform of fiscal rules: expenditure rule anchored to a debt-ratio target coordination of national fiscal policies to achieve appropriate European fiscal stance common unemployment reinsurance scheme for cyclical stabilisation revamped EU budget (larger own resources, end of rebates, more
growth-enhancing expenditure)
Thank you
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