Macroeconomic update: the view from S&P Global Ratings


European markets have been sent into a spin after Europe became the new global epicentre of the COVID-19 pandemic. But are we propelling towards an EU-wide recession or is there still scope for some economies to pull off a soft landing?

The current situation with the COVID-19 pandemic is just so dynamic that every forecast requires a caveat, but economic trends and market behaviour thus far can be analysed and certain outcomes can be assessed based on various assumptions and variables. For a bit more clarity on the developing crisis, we turned to Marcin Petrykowski, Managing Director and Commercial Head for South, East Europe & Nordics at S&P Global Ratings. We asked him for his economic outlook and about the tools the fiscal authorities in Europe can employ to negotiate a path through the economic crisis. 

Given that we are still at the early stages of the situation, what are your early forecasts for the economic effects of the COVID-19 pandemic?

With COVID-19 now present in most countries, we expect that the global macroeconomic impact will be significant. As the coronavirus pandemic escalates and growth heads sharply lower against a backdrop of volatile markets and growing credit stress, our analytical team forecast a global recession this year, with 2020 GDP rising just 1.0%-1.5%. The initial data from China suggests that its economy was hit far harder than projected, though a tentative stabilisation has begun. Europe and the US are following a similar path, as increasing restrictions on person-to-person contact presage a demand collapse that will take activity sharply lower in the second quarter before a recovery begins later in the year. Central banks have swung into action and are undertaking a combination of sharply reduced policy rates, resumed assets purchase and liquidity injections. The fiscal authorities have generally lagged but are beginning to more actively consider targeted spending to the most affected groups. Sad to say, but it looks like the global recession is here and now.

How do you see the situation playing out in the short, medium and long-term?

The virus continues to spread, and an increasing portion of the Eurozone population remains at or near lockdown. Tourism and investment have been the hardest-hit areas so far. We now expect the eurozone economy to contract 0.5%-1.0% this year. COVID-19 will affect first-quarter data (when we expect contraction) somewhat, but we believe the more significant hit will be in the second quarter, with a modest recovery to follow. It still remains unclear how successful governments will be in restricting the economic implications of the pandemic and what will be the ultimate effect of their decisions. Our analysts foresee a U-shaped recovery of activity starting before the end of June, but they also expect it will be fragile since the situation is continuously evolving. Further appreciation of the euro against the US dollar, and muted economic growth in the US because of the pandemic, represent the main downsides to our economic scenario, given their potential impact on European exports. Of course, fiscal, monetary, and regulatory policy actions could mitigate imminent risk to the economy. So far, policy responses in Europe look to be primarily aimed at preventing a sharp increase in corporate insolvencies and unemployment due to a slowdown in corporate turnover.

What measures should the government be taking, from an economic/business point of view?

We expect the European Central Bank (ECB), European sovereigns, especially those representing the eurozone, and the Eurogroup to continue to take action to counteract the drag on growth.

The ECB seems unlikely to lower policy rates much, but it will use cheap long-term refinancing operations (LTROs) and targeted LTROs to smooth the operation of the financial sector. The ECB may choose to relax the deposit-tiering system to alleviate the effect of more negative rates on banks’ interest margins. The ECB can also ease the terms for TLTRO (targeted longer-term refinancing operations) for commercial banks to provide working capital support to affected small and midsize enterprises. Widening sovereign spreads for peripheral borrowers could also lead the ECB to reinforce its public-sector purchase programme either by setting aside its sovereign bond purchase limits, including increasing the amount of monthly purchases, or increasing purchases of corporate bonds to ease market nerves around refinancing risks.

On top of this, we expect stepped-up EU-level fiscal efforts to support the hardest-hit firms and populations. Some sovereigns are already rolling out ad hoc fiscal incentives to relieve tax pressure on the corporates, particularly those in the tourism and air travel sectors. Most governments are also already well on their way to relaunching past subsidies for underemployment as well as creating guarantee schemes for refinancing liquidity constrained corporates and for household mortgages.

The Eurogroup could also reassert the flexibility of its current fiscal rules. These allow a temporary departure from the adjustment path of an EU member state’s medium-term budgetary objective in case of an unusual event outside the control of the EU member which has a major impact on the financial position of the general government. In recent years, EU member states were allowed, on that basis, to cater for budgetary costs related, for example, to refugee inflows and security costs arising from terrorist threats. The clause, however, focuses on short-term, well-identified costs, rather than the impact of long-term structural economic shocks.

Industry expert

Marcin Petrykowski is the Managing Director and Commercial Head for South, East Europe & Nordics at S&P Global Ratings with close to 20 years of international business experience with expertise in general management, strategic growth, sales, capital markets, digital economy, transformation and leadership. Before joining S&P, he was an Executive Director at J.P. Morgan Corporate and Investment Bank in London, covering Russia, CIS, CEE, and Israel for Markets & Investor Services. On pro bono, he is also a Member of the Board of Directors at the American Chamber of Commerce in Poland (AmCham) and the Leslaw A. Paga Foundation.

Marcin Petrykowski
March 19, 2020
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