Covid-19 – What is happening in Europe?

Multiple countries across the continent have announced plans to ease Covid-19 containment measures. Indeed, easing of some form has been announced in countries including Italy, Germany, Spain, France, Norway, Poland, Albania, Austria, Denmark, Belgium, Bulgaria and Slovenia. 

Commercial spaces under 800 sq m in Germany have now re-opened, as well as car dealerships, bike and book shops. The government have also announced plans to re-open playgrounds, churches, museums and zoos from May 4th. However, Germany has postponed plans to reopen schools, following a spike in the Covid-19 reproduction rate in Denmark since they did the same. The German Chancellor, Angela Merkel, has warned that there is a risk of resurgence if the public were to not properly adhere to social distancing guidance. 

The Czech Republic have reduced their five-stage plan, to a four-stage plan, with restaurants expected to resume indoor service and hotels re-opening from 25th May, rather than 8th June, as previously advised.

This week, Switzerland announced that restaurants and cafes will reopen on 11th May, the first country in Europe to outline plans for their re-opening. However, social distancing rules will be in place, with tables two metres apart and limited to two guests per table. 

In Poland, shopping centres and hotels are set to re-open from May 4th, while schools and kindergartens are scheduled to re-open from May 6th. 

Meanwhile, the Greek prime minister has outlined plans to lift the country’s containment measures by 1st July. On 4th May, bookshops, electronics and sports equipment stores will reopen, as well as restrictions lifted on movement in towns and cities. By June 1st, café’s, restaurants and urban hotels will be allowed to open. However, social distancing will continue across the country and masks will be required in public.

Short-term leave schemes have supported Eurozone unemployment

According to the Financial Times, more than 30 million workers in Europe’s top five economies have applied for state short-term leave schemes, similar to the UK’s furlough scheme. This amounts to circa 20% of the combined total workforce of Germany, France, the UK, Italy and Spain, and is expected to cost these countries a combined €100 billion.

These schemes have acted to keep workers on employer’s payrolls, which has meant that the unemployment rate in the eurozone has only risen marginally in March to 7.4% according to Oxford Economics. 

European Central Bank expands its loan scheme to mitigate further losses to the eurozone economy

The ECB announced this week that they will lend money to banks at rates as low as -1%, after flash estimates from Eurostat indicated that the eurozone economy contracted by -3.8% q-q in Q1 2020, the fastest rate of decline on record. By lending to banks at rates below what it offers on deposits, the ECB has become the first central bank to operate a dual-rate system that essentially subsidises banks, according to the Financial Times. The central bank also explained it was “fully prepared” to increase its €750 billion pandemic emergency purchase programme to “as much as necessary and for as long as needed”. 

This comes as ECB growth projections suggested that the Eurozone economy could decline by between -5% and -12% this year, depending on the success of the containment measures. The trading bloc’s largest economies, France, Italy and Spain all experienced quarterly contractions in Q1 2020, of -5.8%, -4.7% and -5.2%, respectively. Italy and France are now in technical recessions, after suffering contractions in GDP in the final quarter of 2019. 

Banks across Europe are increasing their loan loss provisions

Banco Santander has put aside an extra €1.6 billion in Q1 2020, to deal with an anticipated increase in bad debts. While the bank has experienced a “relatively limited impact” from the pandemic in Q1, it has increased its loan loss provisions by 80% year on year, with the expectation that the situation will worsen in the remaining quarters of the year.  

In the UK Barclays has increased their bad loan provisions to £2.1 billion from £400 million one year ago

Last week, Italy’s largest bank, UniCredit, increased provisions by €900 million, whilst loan losses at Credit Suisse surged by 600%. 

Fitch has since downgraded Italy’s credit rating to one notch above junk this week, highlighting the impact of Covid-19 on the country’s economy. The rating’s agency has questioned the sustainability of Rome’s borrowing, after the city took on extra debt to cope with Covid-19. Fitch expect the country’s ratio of debt to GDP to rise by circa 20 percentage points to 156% in 2020, with the increased spending exacerbated by an expected 8% contraction in GDP.   

Covid-19 starts to feed into Eurozone outputs 

As seen elsewhere in the world, the implications of Covid-19 containment measures are becoming more protracted, with survey data this week indicating a significant decline to outputs across Europe. According to Oxford Economics, the eurozone composite PMI fell to a record low of 13.5 in April, which was less than half the previous record of 29.7 in March. During the global financial crisis, the lowest reading was 36.2. This reaffirms the extent of the impact Covid-19 and containment measures are having across Europe. The contraction in the composite PMI was driven, in part, due to the services PMI falling to 11.7, also a record low. 

Meanwhile, the headline manufacturing index was comparatively more robust in April, with a reading of 33.6. Oxford Economics note that eurozone manufacturing was supported by longer supplier delivery times, which may make this data misleading. The manufacturing output index painted a clearer picture, falling from 38.5 in March to 18.4 in April, again, the lowest recorded output reading for the sector. 

Oxford Economics are anticipating Q2 figures will slow further, with continued lockdowns and cautious recoveries expected to impact the economy.