Economic Perspectives April 2020
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The corona crisis is a major shock to the global economy. Economic
growth will move into negative territory in the euro area and the US,
but our base scenario envisages a strong recovery in 2021. This base
scenario is, however, subject to major uncertainty. In general, risks
are tilted to the downside.
The epicentre for the covid-19 virus outbreak is on the move from
China over Europe to the US. It is clear that all countries in the
world will be affected, leading to a globally synchonized growth
decline. In combination with lower oil prices, due to a negative
supply and demand shock, this will result in major deflationary
pressure on the global economy.
Also emerging markets have been hit hard by the covid-19 crisis, but
the health and economic impact could be even more severe and longer
lasting than what’s expected in advanced economies. Weaker public
health systems, higher inequality and poverty, more limited fiscal
space, and external vulnerabilities are factors that may exacerbate
the coronavirus shock in emerging markets. There are, however,
significant differences between the countries with some having better
macroeconomic fundamentals and fewer external vulnerabilities (e.g.
emerging Asia) than others.
Fiscal and monetary policy initiatives aim to mitigate the economic impact of the corona crisis and to boost the recovery. However, policy reactions differ across countries, even within the EU. Monetary policy is expected to stay extremely accomodative in the future.
The outbreak and international spread of the covid-19 virus is undoubtedly the main event now dominating the international economic outlook. Primarily, the corona crisis is a major health crisis and a human tragedy due to the loss of many lives despite all precautions and health care responses. Recent figures indicate that the pandemic’s epicentre shifted from China over Europe to the US (figure 1). While the number of infected people seems to have stabilized in China, Europe is still struggling to cope with the situation. Nevertheless, among the largest economies, the US is facing the most gigantic challenge which at present the US healthcare system is struggling to deal with. The covid-19 virus continues its international spread, reaching all countries in the world, making it a true pandemic as designated by the World Health Organization (WHO).
The virus itself as well as numerous policy responses to contain its
spread are having a tremendous and most likely unprecedented impact on
the global economy. As most countries introduced quarantine measures
and in many cases far-reaching lockdown policies, economic activity
slowed down substantially and was almost completely halted in certain
sectors. There is no doubt that the covid-19 virus has changed the
macro-economic outlook for the global economy. Most importantly,
global growth will tumble as suggested by recent forward-looking
indications in sentiment indicators. Both manufacturing and services
are heavily impacted. Particular sectors like restaurants, tourism and
retail trade are facing unprecedented drops in their economic activity
as the corona crisis causes a negative demand shock. Simultaneously,
the corona crisis is a negative supply shock too. In its early stage,
while the covid-19 virus outbreak was still considered a major
challenge to the Chinese economy alone, it became clear that global
supply chains would be hit. This has only worsened as not only Chinese
factories, but gradually factories in most countries are now facing
production challenges and logistic difficulties to source inputs and
service their international clients. Not surprisingly, the World Trade
Organisation (WTO) recently indicated that it expects a major drop in
global trade in 2020.
Despite the negative impact of the corona crisis on the global
economy, it is important to emphasize that this is not a normal
recession, but a temporary standstill due to the virus containment
measures. One could compare it with the following: “The car doesn’t
drive because the traffic light has suddenly turned red, not because
the engine has seized. Once the light turns green, the car will drive
again, although some cars will restart faster than others.”
Due to the corona crisis, the synchronized growth slowdown in 2019
won’t be followed by a widespread international recovery, as many
expected before the covid-19 pandemic, but rather by a major economic
depression. The good news, however, is that this shock is due to a
major health crisis and not due to notably poorer economic dynamics.
The fundamental features for the global real economy before the virus
outbreak weren’t bad at all: many economies were at or near full
employment, services activities were compensating for the decline in
manufacturing activities that suffered in particular from the US-China
trade war and the Brexit chaos, and private investment was growing in
a low interest rate environment. The corona crisis will shake the
structure of the global economy, but it’s unlikely to fundamentally
derail the global economy from its long-term growth path. While it is
still too early to assess the long-term impact of this corona crisis,
it is likely that certain things will change in the global economy in
the aftermath of the corona crisis. A case in point is the
international struggle to get sufficient medical supplies. One may
expect that governments will aim to improve their access to such
medical products. From a business cycle perspective, we believe that
the economic shock caused by the covid-19 virus will be heavy, but
short. Moreover, the recovery will be boosted by various policy
initiatives to mitigate the economic damage (see further). Hence this
will lead to a very dynamic episode in the global business cycle with
a major growth decline in 2020 followed by a remarkable recovery in
Despite this general expected growth pattern, the future virus
evolution and policy reactions to it are subject to substantial
uncertainty. This makes conventional forecasts of limited value given
the potentially wide range of possible outcomes. Therefore we work
with multiple scenarios to assess the future economic outlook. Apart
from the base scenario, we distinguish between a more optimistic and a
more pessimistic scenario. These three scenarios are distinct from
each other in terms of the virus evolution, the lockdown measures and
the economic implications. In our base scenario we assume that the
current lockdown measures will be continued, by and large, in the euro
area as well as in the US throughout the second quarter. The high
human toll of the covid-19 virus makes it unlikely that governments
will quickly relax precautionary measures. After all, the search for
large-scale tests to identify infected people is still in its infancy.
Moreover, the search for a vaccine will most likely take much longer.
Only in the third quarter, does this scenario envisage that the
precautionary measures will be gradually lifted. Consequently the
first and second quarters will be hit substantially in the euro area,
while the US follows – as the covid-19 virus reached the US later than
Europe – with a substantial drop in the second quarter and a minor
drop in the third quarter. Hence the quarter-on-quarter recovery
starts only in the third quarter in the euro area and in the fourth
quarter in the US. The recovery continues into 2021 leading to a
strong year-on-year growth rebound in the calendar year 2021.
Compared to the base scenario, our ‘optimistic’ scenario assumes a
shorter period of lockdown or disruption from far-reaching
precautionary measures. Such a scenario could come about if extensive
testing for covid-19 can be implemented or simply because society
increases the pressure on governments to lift currrent lockdown
policies. Such a scenario would automatically translate into a more
limited downfall in economic growth. Finally, our ‘pessimistic’
scenario assumes that the covid-19 virus is not under control until a
vaccine becomes available. As society may be opposed to long periods
of lockdowns, governments might opt for on-off lockdown periods to
migitate the impact on the health care system. Alternatively, it could
be the case that there are periodic outbreaks of the virus forcing the
repeated re-introduction of health related curbs on economic activity.
Such a scenario implies that economic activity could be restarted
soon, but would also be forced to shut down again later on. In general
this will imply that the recovery from the corona crisis will take
We assign probabilities to each of these scenario. At the moment,
we’re giving a 50% probability to the base scenario, 15% to the
optimistic scenario and 35% to the pessimistic scenario. Hence risks
are tilted to the downside.
Our base scenario is shown in figure 2. In terms of annual numbers we expect a similar pronounced V-shaped pattern in all major economies. Note that one could call it rather a U-shaped pattern on the basis of a quarterly numbers, taking into account the gradual recovery in the second half of 2020. However, while the broad shape of the swings in activity are similar, the scale of impact differs substantially.
In absolute terms, euro area growth is likely to be hit more than the US due to the drastic precautionary policy reactions in most European countries and the slower and more limited fiscal reaction. Europe’s international openness to trade and investment as well as a weaker starting point in terms of lower growth in 2019 will also play against Europe. For the euro area, we expect growth to decline by 11.3 %, while US growth will drop by 8 % in 2020. We expect a similar recovery in 2021 in both regions, namely 11 % in the euro area and 6.5 % in the US. For China we presume a growth of 1.6 % in 2020, down from 6.1 % in 2019, and a recovery to 6.3 % in 2021. Under our base scenario this pattern implies a rather fast return to the long-term growth path, although it will take a while, in particular in the euro area, before the full effect of the corona crisis will be absorbed (figure 3).
Compared to the base scenario, our optimistic scenario has a milder V-shaped pattern. In the pessimistic scenario the growth decline in 2020 is larger, ranging from -14% in the euro area, over -10% for the US to 0.4% for China. In 2021 one won’t see a similar recovery in the euro area and the US yet. Euro area real gdp growth will equal -3.2% in 2021, against -2.8% for the US. One has to wait for 2022 to get a stronger recovery. All figures are available in table 1.
Hopeful news from China
In recent weeks, the number of new cases as well as covid-19 casualties dropped substantially throughout China. The Chinese city of Wuhan is considered the initial epicentre of the covid-19 pandemic. Symbolically, social and economic life is restarting in Wuhan. Meanwhile, Chinese economic indicators such as vehicle sales are the first to signal that economic activity is likely to recover soon after the virus gets under control. Additional March data suggest that the recovery is more dynamic in the manufacturing sector compared to the services sector, which in turn reflects the fact that businesses and factories have reopened, but consumers are still very cautious. Retail trade contracted sharply again in March (-15.8% yoy), while industrial production only contracted by 1.1% yoy in March, compared to a 13.5% contraction in February (Figure 4). In general, what more recent data out of China suggest is that the relative bounce-back after the lockdown can be strong, but that in terms of output levels, it will take more time to return to the pre-covid-19 scenario.
The fact that economic life in China is restarting relatively fast
after the start of the virus outbreak is hopeful news for the global
economy. Moreover, as a major economy, the Chinese recovery
contributes to mitigating the economic shock in western economies. The
Chinese demand for western goods as well as the Chinese supply of
products will gradually recover. Despite these optimistic signals one
has to be cautious. First, China remains vulnerable to the virus as a
recent number of new cases indicate that people travelling from abroad
may import the virus again into China. Second, the production and
sales decline in the Chinese economy was sizeable, hence a full
recovery may take a while and will be more difficult given the
slowdown of the global economy.
We expect Chinese real GDP growth to start to recover already in Q2, but growth in year-over-year terms will remain weak compared to China’s previous growth path. This is because the threat of a new wave of covid-19 cases is still a risk in China, the very weak growth we expect globally in Q2 will weigh on China’s growth, and confidence will likely be slow to fully recover. Overall, we expect China to grow only 1.6% in 2020, compared to 6.1% growth in 2019. In 2021, however, we expect annual growth to recover to 6.3%.
Struggle in Europe
After the initial outbreak in Northern Italy, the covid-19 virus succeeded in spreading widely across most of the European continent as well as the UK and Ireland (figure 5). Despite initially different approaches, most European countries turned to a broadly similar strategy of far-reaching quarantine and lockdown measures. The ultimate purpose is to reduce the near-term inflow of patients into hospitals as the number of hospital beds and other medical equipment would be insufficient to treat all patients simultaneously. Most European countries appear to be succeeding in this strategy. However, in certain regions of Italy and Spain, it is clear that hospitals have been overwhelmed by the number of covid-19 cases.
On the economic front, European governments are taking similar initiatives too, but there are also clear differences. Throughout Europe, governments aim to mitigate the impact of the corona crisis through temporary fiscal support to businesses and households. Fiscal support should help companies and individuals to survive the temporary economic shock. The financial sector is strongly involved to facilitate and support these temporary solutions. As such, the full force of the crisis can be avoided, in particular for fundamentally sound firms and households that face a temporary drop in their incomes. Special attention is paid to the situation in regard to the labour market. Most European countries introduced some kind of temporary unemployment schemes (see Box 1). Their purpose is to enable a faster restart after the lockdown measures are lifted and to avoid people losing jobs permanently. In the less flexible continental European labour markets, in particular, these kind of measures make sense. By contrast it might be expected that Anglosaxon countries like the UK and Ireland could face a more substantial increase in their unemployment rates. Apart from those transitory policies a debate is now underway in many countries to come up with more structucal fiscal support to boost the recovery through public investment. However, European countries differ substantially in the available fiscal space to finance these kind of major policy actions. Both the temporary policies and an eventual increase in structural investment will undoubtely lead to large fiscal deficits and increasing public debt ratios in all European countries. Hence the corona crisis will cause a major deterioration in public finances. Given the exceptional nature of the corona crisis, most economists agree that these circumstances are a valid argument for this kind of policy reaction.
It is very regrettable that a major crisis like this corona crisis
has led to European countries dealing with the issue separately.
European coordination and cooperation remains limited. Health care is
obviously a national competency and hence there isn’t much the EU can
do apart from some international coordination. In terms of economic
policies the EU has more responsibilities, but unfortunately it lacks
the automatic tools in scope as well as size to act fast and
convincingly. There are no automatic fiscal stabilizers at the EU
level. The common EU budget is much too small to deal with a major
economic shock nor has it been designed for any role in such
circumstances. Hence the EU can only provide support if new budgets
and/or new instruments are created, similar to what happened after the
global financial crisis and the European sovereign debt crisis.
So far, negotiations in the Eurogroup and the European Council have
not gone smoothly. Individual European governments clearly disagree as
to the kind of support mechanisms that should be launched and in
particular on how and to what extent financial solidarity should
underpin such support. The Dutch government has been the most visible
opponent of massive financial support to countries hurt by the crisis,
in particular to Southern European countries. However, the Dutch view
is shared to varying degrees by a number of other (richer) EU member
states. The latest compromise resulted in a measure of European
support to small and medium sized enterprises as well as to
temporarily unemployed people. The European Investment Bank as well as
the European Stability Mechanism will be used to provide some fiscal
support to countries in need. However, it is clear that these European
initiatives will be insufficient to cope with the corona crisis. It
remains to be seen whether additional European initiatives will be
launched in the future. If not, there is a risk that the European
economy will face a more difficult recovery period as well as
longer-term negative consequences of this unfortunate economic
As European countries are hurt to various extents by the covid-19 virus and as policy reactions to the corona crisis differ across countries, we expect that European countries will face different growth dynamics. However, the general pattern remains the same: a major drop in economic growth in 2020 followed by the recovery in 2021. The magnitude of the shock as well as of the recovery differs, however, across countries (table 2).
Box 1: Temporary unemployment a crucial pillar in avoiding a
Estimates for average real GDP growth in 2020 are written in blood red ink. The seldom seen negative numbers are the result of sudden stagnation in large parts of the economy due to covid-19. Nevertheless, there is also an optimistic element in the severely negative growth figures. After all, the base scenario assumes that the economy will largely recover as measures against the spread of the virus are lifted. In other words, the stagnation of the economy will not trigger a downward spiral of mass redundancies and bankruptcies. A crucial pillar for this scenario is the schemes of temporary unemployment and income support, which are now being activated, extended or created in many countries.
A sharp drop in turnover normally encourages companies to lay off employees. However, by this production capacity is definitively lost. When demand later picks up again, they have to look for new suitable employees. These employees have to learn the production processes again. This takes time (and costs) and slows down the restart of the economy. Companies with highly specialised employees will try to avoid dismissals as long as possible in the event of a drop in demand. In this way, they prevent the search and start-up costs when demand recovers. However, a sudden and very sharp drop in demand, such as today, reduces their financial breathing space for this. Moreover, the corona crisis primarily affects service sectors, where employees are sometimes a little less specialised and companies will still want to say goodbye to them sooner.
Temporary unemployment or income support systems help to prevent
this. Belgium has long been familiar with the system of temporary or
technical unemployment. Internationally, reference is often made to
the German system of Kurzarbeit. It allows companies in certain
circumstances to limit the working hours of employees. A government
allowance then compensates, at least partially, for their loss of
income. Thanks in part to Kurzarbeit, unemployment in Germany hardly
rose during the deep recession after the financial crisis of 2008.
Belgium, too, experienced only a limited rise in unemployment at that
Anglo-Saxon economies did not have such systems. They generally have
more flexible labour markets. Economic shocks cause unemployment to
rise faster and more sharply. In normal circumstances, a stronger
recovery follows. Nevertheless, it reduces macroeconomic stability.
Especially when, as at present, labour-intensive sectors with
sometimes relatively low wages are hit. The loss of purchasing power
as a result of mass redundancies can then sharply amplify the fall in
demand in the economy and fuel a negative spiral. This will further
increase the economic damage. The recovery from a deep crisis then
threatens to drag on for longer, resulting in even more economic
damage. As unemployment lasts longer, skills are lost. Ultimately, the
long-term growth potential of the economy is eroded.
Many countries are now relying heavily on systems of temporary
unemployment and income support. Existing systems are being extended
and conditions made more flexible. The abruptness and scale of the
economic shock make rapid and smooth implementation essential. The UK
is creating a system, and even in the US small businesses receive
government support if they retain workers. Systems are also being set
up in Central Europe, often in the form of wage subsidies to
companies, similar to the French system of temporary
Temporary unemployment and income support systems are crucial in a
crisis like this one. But they also cost the government a great deal
of money. In principle, however, they are temporary expenditures. They
do not structurally worsen public finances. They do not pose a problem
if the objective of a rapid pick-up in economic output as soon as
demand picks up is achieved. If that does not happen, or is
insufficient, a problem for public finances will arise. Unemployment
then becomes permanent and requires a different economic policy.
In this context, Spain deserves special attention. Despite strong economic growth in recent years, unemployment has still not returned to its pre-financial crisis level of end-2007 (figure B1.1).
Today, the Spanish labour market once again appears to be one of the
most vulnerable in Europe. More than a quarter of total employment is
in services sectors which are very sensitive to corona crisis
measures. This is significantly more than in the other (medium) large
economies in the euro area (figure B1.2). The risk that part of the
temporary unemployment will eventually become permanent is highest
Alle historische koersen/prijzen, statistieken en grafieken zijn
up-to-date, tot en met 9 april 2020, tenzij anders vermeld. De
verstrekte standpunten en prognoses zijn die van 9 april 2020.