covid-19: economic brief...business in strict confidence coronavirus tracker: further tightening in...

Business in strict confidence

COVID-19: Economic Brief

Assessing implications for economies, sectors and markets

Grant Colquhoun and Marie-Louise Deshaires

17 April 2020


Developments and implications summary – 17th April

2

Overview ◼ European nations including Italy, Spain and Germany are taking steps to gradually open up some activities. Lockdowns have been extended in France and the United Kingdom, however.

◼ There are signs that new cases are flattening in the United States, but New York has extended its lockdown. The state of emergency in Japan has been extended nationwide in response to rising new cases.

Sectors ◼ United States industrial production recorded its steepest month-on-month fall since 1946 in March and worse is to come in April.

◼ Car sales in major markets plunged in March. In the autos supply chain, rubber, plastics and metals sectors are the most exposed to the downturn.

◼ European banks’ non-performing loans look set to jump, but we don’t expect a full-blown banking crisis.

Markets ◼ Emerging market currencies have generally fallen back in recent days as the equity market rally has stalled and oil prices have dropped. Although they may face further turbulence, we continue to think that most emerging market currencies will end the year higher than their current levels.

Recovery path ◼ We believe China’s GDP data for Q1 understate the extent of the decline. The recovery will probably continue to underwhelm due to labour market strains and renewed pressure on exports.

◼ While the removal of restrictions in a number of European countries won’t prevent a precipitous decline in output in Q2, it increases the likelihood of a return to growth in Q3.

Forecasts ◼ Our latest forecast is for the global economy to shrink by 4.5 per cent this year. China, Korea and the United Kingdom have seen forecast downgrades this week.

◼ We have increased our forecast for global economic growth in 2021 to 8.5 per cent from 8.0 per cent last week. China, Mexico and the United Kingdom have seen forecast upgrades.


Developments and implications summary – 17th April

3

Asia Europe Americas

◼ Gross domestic product declined 6.8 per cent on an annual basis in Q1 2020. This was the first decline since China began publishing quarterly data in 1992.

◼ In Japan a second wave of virus cases driven by rising infections in Tokyo and Osaka has triggered a major shift in economic behaviour. And while new cases in the two lynchpins of the Japanese economy have stabilised in recent days, yesterday’s declaration of a nationwide state of emergency until 6th May suggests economic activity will remain extremely subdued over the coming weeks.

◼ In South Korea, the city of Daegu, which endured the first large coronavirus outbreak outside of China, reported zero new cases for the first time since late February on the 10 April. New cases across the country have decreased to record lows.

◼ As new case numbers continue to ease across European countries, some activities have been allowed to reopen in Italy, Spain, Germany and in some smaller economies. Lockdowns have been extended in France and the United Kingdom, however.

◼ The slump in economic activity will cause a significant increase in banks’ non-performing loans. The decline in gross domestic product of around twenty per cent that we have pencilled in for Q2 might result in non performing loans ratios rising by twelve per cent.

◼ Car sales are plunging in Europe and major overseas markets. Germany and some Emerging European countries are most exposed due to the relatively large size of the auto sectors and supply chains in their countries.

◼ President Trump is keen to reopen the economy, but states appear more cautious. We expect a fairly modest recovery in output in Q3.

◼ The sharpest monthly in industrial production since 1946 highlights that although coronavirus containment measures have primarily slammed the brakes on service sector activity, the manufacturing sector is also set for a significant downturn.

◼ In Brazil, major cities such as Rio de Janeiro and Sao Paolo appear ready to pass more forceful lockdowns if necessary.


Coronavirus tracker: Further tightening in Asia, but promising signs in Italy

4

New cases per million people*

Trend in new cases

Latest virus containment policy developments

Asia

China 0.04 No new policy developments in last week.

Korea 0.7 Parliamentary elections held despite social distancing restrictions and a ban on large events.

Japan 3.8 State of emergency extended to cover all of the country.

Singapore 54.3 No new policy developments in last week.

India 0.1 No new policy developments in last week.

Europe

Germany 23.8Easing of restrictions with small shops able to restart their businesses from Monday 20 April and schools to reopen gradually from 4 May.

France 52.4 Extension of the lockdown until 11 May.

Italy 55.6 A limited number of shops and businesses have been allowed to reopen.

Spain 73.4People in manufacturing, construction and some services are being allowed to return to work, but must stick to strict safety guideline.

Poland 0.2Gradual lift of lockdown measures imposed to contain the novel coronavirus from April 19, starting with restrictions on shops.

United Kingdom 91.6 Extension of the lockdown until at least 7 May.

Americas

United States 86.8 New York extends lockdown until at least 15 May.

Mexico 0.1 No new policy developments in last week.

Brazil 5.2 No new policy developments in last week.

Improving / Less

restrictive

Worsening / More

restrictive

Sources: Capital Economics and variousNote: *Three day average.


Falling new cases in Europe pave the way for the easing of containment policies and a return to growth in the third quarter

5

Latest total confirmed cases of coronavirus, selected countries, thousands countries

Sources: Capital Economics and RefinitivNote: Case numbers subject to revision.

Daily reported change in cases of coronavirus, selected countries, thousands

New York extends its lockdown

• Signs that the number of daily new infections in the United States may peaked have been thrown into doubt by a renewed rebound in recent days. New cases have picked up to over 30,000 in the latest data compared to a low of 25,000 earlier in the week. The Trump administration published guidance detailing three phases to reopen state economies, with each phase lasting, at minimum, 14 days. That said, he acknowledged that the states themselves would determine the re-opening of their economies. New York extended its lockdown until at least 15 May.

• In Asia, Japan is seeing the number of new infections increase, albeit from relatively low levels. As a result, the Japanese government declared on Thursday an extension of the emergency period to May 6.

Some European countries take steps to open up activities

• Italian and Spanish new infections have been trending downwards, prompting some easing of containment measures. In Italy, a limited number of shops and businesses have been allowed to reopen and a return to work is being allowed in Spain in manufacturing, construction and some services.

• Falling new infections in Germany have paved the way for small shops being allowed to reopen on Monday, with schools expected to open gradually from 4 May. Danish children under 11 returned to school this week, Austria allowed some small shops to reopen and Switzerland announced that it will start to ease its containment measures from 27th April. Meanwhile, lockdowns have been extended until early May in France and the United Kingdom. While the removal of restrictions won’t prevent a precipitous decline in output in the Q2 across Europe, it increases the likelihood of a return to growth in Q3.

0

200

400

600

800

0

50

100

150

200

20-Jan 03-Feb 17-Feb 02-Mar 16-Mar 30-Mar 13-Apr

China Italy Spain

South Korea Japan United States (RHS)

0

10

20

30

40

0

3

5

8

10

20-Jan 03-Feb 17-Feb 02-Mar 16-Mar 30-Mar 13-Apr

Italy Japan S. Korea Spain United States (RHS)


Gross domestic product contracted for the first time since 1992

• Gross domestic product declined 6.8 per cent on an annual basis in Q1 2020, following a 6.0 per cent expansion in Q4 2019. In seasonally adjusted quarter-on-quarter terms gross domestic product declined 9.8 per cent, equivalent to a 34 per cent contraction in annualised terms. This was the first decline since China began publishing quarterly data in 1992.

• While an outright fall in official gross domestic product would have been unthinkable just months ago, there are reasons to think that the statistics bureau is still not fully acknowledging the extent of the downturn. Almost all the main economic indicators contracted at a double-digit pace in Q1. In particular, the monthly data on retail sales and broader service sector activity point to a sharper downturn in services output than the gross domestic product data do.

China on track for a drawn-out recovery

• The March data add to broader signs that China’s economy is past the worst. The contraction in industrial production eased to -7.3 per cent, from -13.5 per cent on an annual basis in January and February. The services production index and nominal retail sales also improved. Fixed asset investment contracted during the first three months of the year but the rate of contraction has eased, driven by infrastructure spending.

• The recovery, however, will probably continue to underwhelm. Domestic demand is being held back by labour market strains as the unemployment rate remained elevated in March, and per capita incomes declined outright in Q1. Meanwhile, exports are set to come under renewed pressure in the coming months due to the lockdowns elsewhere in the world and resulting slump in foreign demand.

China faces slow recovery from first quarterly economic contraction on record

6

China’s real gross domestic product

Sources: Capital Economics, Wind and CEIC

China’s real disposable income, annual change, per cent

-40

-20

0

20

-40

-20

0

20

07 09 11 13 15 17 19

% q/q seas. adj. (annualized, 2011 onwards) % y/y

-8

-4

0

4

8

12

15 16 17 18 19 20

Urban Rural National


United States industrial production and retail sales collapse in March and worse is to come

7

US industrial production experienced its sharpest fall since 1946

• The 5.4 per cent month on month plunge in industrial production in March, was the sharpest monthly fall since 1946. The decline highlights that while coronavirus containment measures have primarily slammed the brakes on service sector activity, the manufacturing sector is also set for a significant downturn. The collapse in the Empire State manufacturing index to a record low of -78.2 in April, leaves it consistent with manufacturing output falling at around a twenty per cent annualised pace.

• Industries that might be expected to benefit from the pandemic such as food and beverage saw weaker production. Utilities output fell by a modest 3.9 per cent on a monthly basis last month, presumably as increased demand from households partly offset weaker industrial consumption, while mining output fell by 2.0 per cent. With drilling activity in freefall following the collapse in global oil prices and United States crude production already starting to decline, mining output will fall significantly further over the coming months.

Drop in discretionary spending partially offset by store rise

• The 8.7 per cent month-on-month fall in retail sales in March suggests that first-quarter real consumption declined by up to five per cent annualised. The big headline fall masks a huge divergence in spending by category. There were clear signs the pandemic was keeping consumers away from malls. Food service and drink places sales were down 26.5 per cent, but that slump was almost completely offset by a 25.6 per cent surge in grocery store sales, as consumers were locked down at home

• With widespread lockdowns only beginning around the middle of the March, retail spending looks like it will fall by at least as much again in April.

United States empire state manufacturing index and manufacturing output

Sources: Capital Economics and Refinitiv

March 2020 retail sales by category, month-on-month change, per cent

-60 -40 -20 0 20 40

ClothingFurniture

Food/Drink ServicesAutos

LeisureGasolineElectrical

Building MaterialsNonstore

HealthGeneral Merch.

Food & Drink

-20

-15

-10

-5

0

5

10

-80

-60

-40

-20

0

20

40

Jan-12 Jan-14 Jan-16 Jan-18 Jan-20

Empire state index (LHS)

Manufacturing output change*, per cent (RHS)


Europe shows wide variation in stringency of containment measures adopted versus coronavirus infection rates

8

A measure of governments’ containment policies

• The University of Oxford’s Blavatnik School of Government compiles a measure for countries around the world of government policies to contain the spread of COVID-19. Qualitative data on seven policies, such as school and workplace closures and bans on public gatherings, are collated, then expressed as a Stringency Index. The index has a score between 0 and 100, where 100 represents the highest level of stringency.

Strict Italian and Spanish measures reflect high infection rates

• In Europe, Italy and Spain have had some of the most stringent containment measures in place to tackle high infection rates and are towards the top right in the chart. The line in the chart shows the ‘average’ relationship in Europe between the stringency index and infection rates. France, Austria and Denmark have had similarly restrictive policies but lower infection rates, putting them above the average line. Conversely, countries below the line, like the United Kingdom, Switzerland, Germany and – most noticeably – Sweden, show less stringency than the average country given their number of confirmed cases per million.

• The extent of restrictions, the infection rate and the speed with which the virus is brought under control and restrictions eased will all influence the scale of the economic impact on countries. Of course, factors such as the sectoral composition of economies and linkages to other economies are also key. But countries such as such as Austria and Denmark which brought in stringent measures relatively quickly (see next slide) and are beginning to ease them, could fare less badly than countries such as the United Kingdom, which reacted later and less aggressively.

Coronavirus cases and stringency index in selected European countries as of 8 April 2020

Sources: Capital Economics and Blavatnik School of Government University of Oxford

Austria

Belgium

Czech Rep.

Denmark

France

Germany

Italy

Netherlands

Poland

Portugal

Spain

Sweden

Switzerland

United Kingdom

40

50

60

70

80

90

100

0 1000 2000 3000 4000

Str

ingency

index

(0 to 1

00

)

Number of coronavirus cases, per million people

Average relationship


Austria and Denmark brought in strict measures quickly and are beginning to ease them

9

Stringency index of selected European countries (0 to 100)

Sources: Capital Economics and Blavatnik School of Government University of Oxford

Stringency index of selected European countries (0 to 100)Stringency index of selected European countries (0 to 100)

0

25

50

75

100

01-Jan 16-Jan 31-Jan 15-Feb 01-Mar 16-Mar 31-Mar

Germany United Kingdom Switzerland Sweden

0

25

50

75

100


Austria Belgium Denmark Netherlands

0

25

50

75

100


Portugal Ireland Czech Republic Poland

0

25

50

75

100


Spain France Italy

Stringency index of selected European countries (0 to 100)


Global and European autos slump to be felt hard in Germany and Emerging Europe

10

European car sales in 2020, year-on-year change, per cent

Sources: Capital Economics and ACEA.

Auto cutback implied change in gross value added in selected European countries, per cent

Rubber, plastics and basic metals most exposed in supply chain

• Already weakening European car sales plunged by 55 per cent year-on-year in March. China and the United States posted falls last month of 48 per cent and 34 per cent, respectively. We expect global car sales and output to stabilise in the second half of the year and for production for the year to contract by 20 per cent.

• Around 2.5 per cent will be taken off output in the most exposed sectors of the autos supply chain in Europe, rubber and plastic and basic metals. On their own, auto cutbacks and supply chain impacts will subtract around 0.8 per cent from the European economy, with Germany and some Emerging European countries being impacted by about twice that amount. Reduced spending and investment by employees and firms, respectively, in the autos sector and its supply chain will be a further drag on GDP.

Auto cutback implied change in gross value added in selected parts of the European auto sector supply chain, per cent

-100

-75

-50

-25

0

Germany UK Spain France Italy Europe*

January and February March

-3

-2

-1

0

Basic

metals

Rubber &

plastics

Fabricated

metals

Electrical

equipment

Machinery Electronics

-3

-2

-1

0

Czech

Republic

Slovak

Republic

Hungary Germany Romania Poland

* European Union, the United Kingdom, Switzerland, Norway and Iceland


Eurogroup’s fiscal boost falls short as Bank of France confirms depth of French downturn

11

France capacity utilisation as a share of pre-crisis, per cent

Sources: Capital Economics and Banque de France

France first estimate of economic slump

• The Bank of France last week provided some more granular evidence of the extent of the slump in its economy. Based on a survey of 8,500 managers undertaken during the lockdown, it estimated the economy was running around 32 per cent below normal levels, in line with earlier findings from the French statistical office. It also provided a breakdown of industrial output by sector. And based on evidence which is not publicly available, such as the 50 per cent drop in payments via bank cards in the last week of March, the Bank estimated that household spending fell by 30 per cent too.

• Overall, it concluded that contracted by around six per cent on a quarterly basis in Q1 2020. The scale of the overall slump is consistent with our own view that euro-zone gross domestic product will be some 25 per cent below normal levels during the lockdown periods.

Eurogroup agrees on lowest common denominator

• On 10 April, the Eurogroup’s agreed on 540 billion euros, or 4.5 per cent of gross domestic product, of support for responses to the coronavirus crisis. There are three elements to the package. The first is that the European Commission is providing up to 100 billion euros from its existing budget to boost national programmes for workers and the self-employed. Second, the European Investment Bank will provide guarantees worth up to €200 billion euros focused on lending to small and medium-sized enterprises. And third the Eurogroup agreed on “Pandemic Crisis Support” worth 240 billion euros.

• This falls a long way short of the large-scale joint fiscal boost which many euro-zone governments had argued for, and which would have done more to contain the surge in public debt.

0

20

40

60

80

Pharm

a

Agro

-ind

ICT

Chem

icals

Wood, paper

Oth

er

Ele

ctri

cal

Oth

er

transp

.

Mach

/equip

.

Pla

stic

s

Clo

thes,

etc

.

Meta

ls

Total industry = 56%


We do not expect the coming rise in banks’ bad debts to cause a full-blown banking crisis

12

Government loan guarantees will help to limit damage to banks

• The slump in economic activity will cause a significant increase in European banks’ non-performing loans. There is no hard and fast rule relating economic activity to non-performing loans. The size and duration of the downturn matters. Looking at 2009 as a guide and excluding Italy and Germany, which seem outliers, the relation suggests that a five per cent contraction in gross domestic product might cause around three per cent of loans to turn bad. As a result, the twenty per cent decline in gross domestic product that we have pencilled in for Q2 might result in non performing loans ratios rising by twelve per cent.

• The 120 euro billions in capital relief provided by the European Central Bank last month would be equivalent to just a tenth of the rise in non performing loans, if 12 per cent of loans become non-performing. That said, government loan guarantees are much bigger, and on the face of it look more than sufficient to cover potential defaults in Germany and Italy, and roughly the right size in France and Spain.

Even with guarantees in place, banks will face losses

• Banks will still face losses as some firms will already have gone bankrupt. What’s more, the guarantees often do not cover 100 per cent of loan amounts and some firms are not eligible to benefit from them. They are also time limited, so some losses will just be delayed rather than avoided. Meanwhile, loans to households have generally not received the same level of guarantees.

• We don’t expect a full-blown banking crisis, but the banks are certain to be left with more non performing loans and less capital. And the weaker outlook for growth and inflation means that interest rates will remain lower for longer, flattening the yield curve and further hampering banks’ profitability.

Change in real gross domestic product and non-performing loans (NPLs) ratio (2009)

Sources: Capital Economics and Refinitiv

Government loan guarantees and rise in non-performing loans, as a share of gross domestic product, per cent

-6.0

-4.5

-3.0

-1.5

0 2 4 6 8 10Change in G

DP (per

cent)

Change in NPLs ratio (percentage points)

Germany Italy

Association including Italy and Germany

Association excluding Italy and Germany

0

15

30

45

Italy Germany France Spain

6% of loans 12% of loans Loans guarantees


Western European economies to post the largest economic contractions this year

13

-15

-12

-9

-6

-3

0

3

6

9

Forecast as of 17th April Pre-crisis forecasts

Source: Capital EconomicsNote: * China Activity Proxy, not official measure of gross domestic product.

Latest forecast for year-on-year change in gross domestic product in 2020, alongside pre-virus forecasts, per cent


Gross domestic product forecasts in detail, selected countries – 17th April

14

Real economic growth rate, quarter-on-quarter, per cent

Forecasts, year-on-year, per cent

Revisions since pre-crisis, percentage points

Q1 Q2 Q3 Q4 2020 2021 2020 2021

Asia

China* -19.5 13.5 7.0 3.5 -5.0 15.0 -10.0 8.5

Korea -1.5 -8.0 6.0 1.7 -3.0 5.0 -5.5 2.5

Japan -0.7 -12.0 7.3 2.5 -7.0 5.0 -6.8 4.1

India 0.0 -5.2 7.7 1.8 1.0 9.0 -4.7 2.5

Europe

Germany -2.5 -18.0 13.0 6.0 -9.0 10.0 -9.2 9.4

France -2.5 -18.0 13.0 6.0 -9.0 10.0 -9.8 9.0

Italy -5.0 -20.0 18.0 10.0 -10.0 10.0 -10.2 9.8

Spain -2.5 -18.0 13.0 6.0 -9.0 10.0 -10.3 8.5

United Kingdom -1.5 -24.0 16.0 4.8 -12.0 10.0 -13.0 8.0

Americas

United States 0.0 -12.0 4.0 5.0 -5.0 6.5 -7.0 3.6

Mexico -0.3 -10.0 2.5 4.0 -6.0 5.5 -6.5 3.7

Brazil 0.0 -4.0 0.8 1.0 -1.5 2.3 -3.0 -0.9

World -5.2 -6.0 6.3 3.7 -4.5 8.5 -7.3 8.5

Source: Capital EconomicsNote: * China Activity Proxy, not official measure of gross domestic product.


Summary of containment measures in place, selected countries

15

Summary of containment measures in place

LockdownSchools closed

Borders closed

Social distancing

Large events banned

Non-essential businesses

closed

Asia

China ✓ ✓ ✓ ✓ *Korea ✓ * ✓ ✓

Japan * ✓ ✓ ✓ ✓ *Singapore ✓ ✓ ✓ ✓ ✓

India ✓ ✓ * ✓ ✓ ✓

Europe

Germany ✓ ✓ ✓ ✓ *France ✓ ✓ * ✓ ✓ ✓

Italy ✓ ✓ * ✓ ✓ *Spain ✓ ✓ ✓ ✓ ✓ *Poland ✓ ✓ ✓ ✓ ✓ ✓

United Kingdom ✓ ✓ ✓ ✓ ✓

Americas

United States ✓ ✓ * ✓ ✓ ✓

Mexico ✓ ✓ ✓ ✓ ✓

Brazil ✓ ✓ ✓ * *

Legend

* Indicates partially in place

✓ Indicates (largely) in place

Indicates (largely) not in

place

Sources: Capital Economics and various


Contact details

16

Grant Colquhoun

Head of Consultancy

[email protected]

Marie-Louise Deshaires

Economist

[email protected]

mailto:[email protected]

mailto:[email protected]

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