The coronavirus crisis threatens the survival of 15 percent of German companies, according to their responses to the ifo Business Survey for November. “That’s an improvement over June, when the figure was 21 percent,” says Klaus Wohlrabe, Head of Surveys at ifo. “Nevertheless, 86 percent of travel agencies and tour operators currently feel threatened, as do 76 percent of hotels and 62 percent of restaurants.”
Activity slowed in November in many European countries, but remained at a relatively fast speed of expansion in most economies, except for Spain and France, where manufacturing activity contracted. Two surprises are worth mentioning: Sweden and Switzerland saw a stronger acceleration of manufacturing activity in October.
EURUSD´s resistance to break the 1.20 level in the short-term is underpinned by a weaker growth differential and broad uncertainty about vaccine developments, i.e. which ones will gain approval and how they will effectively be distributed across the euroarea.
Miguel Navascués | The depression and the drop in inflation -or even deflation- have led the central banks to try a disastrous experiment: negative interest rates. Even Christine Lagarde speaks of putting the reference interest rate at -2%. This has been a mistake for several reasons. It discourages the holding of liquid deposits (which logically yield zero or negative), but it does not make people anticipate consumption, if prices stagnate or fall.
Crédito y Caución (Atradius) |For many businesses around the world, 2020 has been the most challenging year experienced for some time. Global GDP is forecast to contract by more than 4% this year, world trade by about 15% and insolvencies to increase by 26%. Without exception, every country polled in Europe reported an increase in late payments which corresponds to an average two-thirds increase on pre-pandemic figures for the whole region. This would make a bigger downturn than the 2008/2009 recession.
Crédito y Caución (Atradius) | Hungary’s current account turned to a deficit in 2019, due to rising disposable income and import-intensive investment. The deficit will increase in 2020 to 1.8% of GDP, mainly due to export deterioration. External debt is very high and increasing to about 100% of GDP in 2021, with the share of inter-company lending amounting to 37%. A large share of external debt is foreign currency-denominated, and a sharp forint depreciation would hurt many Hungarian households and businesses whose loans are denominated in foreign currencies. The forint remains vulnerable to international investors’ sentiment due to the elevated external and public debt levels and a suboptimal institutional and policy environment. However, strong GDP growth in the coming years should continue to support the exchange rate.
In the UK, the fiscal party continues. The government announced £12bn of funding for green initiatives this week and £16.5bn in additional defence spending. The government also published its latest public sector finances. For the fiscal year so far, the net borrowing requirement is £215bn, a staggering £169bn more than in the same period last year. The level of net public sector debt exceeded $2trn last month and stands at 100.8% of GDP, a level not seen since the 1960s.
Assuming the pandemic comes to a gradual end, a robust recovery of investments, private consumption and exports output should lead to an economic rebound of almost 7.5% in 2021. Unemployment is expected to decrease again next year. However, besides a resurge of the pandemic, any deterioration of the Greek-Turkish relationship could hurt economic performance, especially within the tourism sector (e.g. if Turkey again opens the border for refugees to move on to Greece, or in case of rising military tensions and clashes in the Aegean Sea).
“For single people with low wages, there is little financial incentive to work full time. If they had an additional income of EUR 10 per hour gross, they would see only EUR 2.50 to 3.90 of this in their net income. This is a finding of a study by ifo researchers Andreas Peichl and Maximilian Blömer for the Bertelsmann Stiftung. “The fatal combination of taxes, social security contributions, and the high withdrawal rate of benefits are to blame,” Peichl says. “This error in the system must be corrected. The workforce is shrinking, and soon we’ll need all hands on deck.”
European Views | EU governments need to make sure a significant slice of their recovery funds are spent on solidifying the foundations of the digital economy at a time of sweeping economic transformation. While Finland and Sweden rank first and second in terms of both citizens’ internet use and in digital skills, southern European economies find themselves lagging in relation to their EU peers. Even Germany, Europe’s economic engine, has not realized its full potential in all matters digital.