COPING WITH COVID-19 IN DIFFERING WAYS - ALLIANZ RESEARCH - Euler Hermes
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Photo by Justin Luebke on Unsplash ALLIANZ RESEARCH COPING WITH COVID-19 IN DIFFERING WAYS 09 JULY 2020 04 Light and targeted lockdowns to fight the second wave of Covid-19 infections will constrain the pace of recovery. 06 Monetary bazooka: unprecedented balance sheet expansion, differentiated returns. 07 Fiscal bazooka: prompt but unequal in size and multipliers. More to come? 08 Mind the investment cycle: confidence matters 09 Global trade is not expected to come back to pre-crisis levels before 2023 10 Markets are Pavlovian, picky and defensive 11 In the medium term, we expect GDP growth to be impaired by the legacies of the crisis 12 Regional outlooks
Allianz Research
The light and targeted lockdowns to fight the second wave of Covid
-19 infections will constrain the pace of recovery. We expect global
EXECUTIVE
GDP to contract by -4.7% in 2020, followed by growth of +4.8% in
2021. Since April 2020, the global economy has been operating at
70%-80% capacity and we expect this situation to persist until Q4
2020, albeit to a lower extent, due to targeted lockdowns to com-
SUMMARY bat new outbreaks and prolonged sanitary restrictions. A return to
pre-crisis levels for the global economy is now expected only at the
end of 2021. However, managing the risks of a second wave will be
crucial in determining the size of the shock. Hot spots include Brazil,
Mexico, the U.S, India, Indonesia, the UK and South Africa, countries
that are particularly at risk of renewed outbreaks and false restarts.
Monetary and fiscal stimulus in response to the Covid-19 crisis has
amounted to more than USD18tn in 2020, 1.3 times the Chinese
GDP. But differentiated returns will create divergent recoveries. Our
proprietary monetary impulse indices show the record high levels in
the U.S., the Eurozone and the UK. However, China’s is still a far cry
Ludovic Subran, Chief Economist
from the peaks reached after the 2009 financial crisis. Meanwhile,
+49 (0) 1 75 58 42 725 global fiscal support has amounted to USD10.4tn since March 2020
Ludovic.SUBRAN@allianz.com (12% of global GDP), ranging from 3%-18% of countries’ GDP. This
along with the size of automatic stabilizers will shape the future
Alexis Garatti, Head of Economic Research recovery trajectories by country. Germany, the Netherlands, Switzer-
Eric Barthalon, Head of Capital Markets Research land and Austria are expected to recover faster, while Japan, the
U.S., Spain, the UK and Italy are likely to need even more fiscal stim-
Ana Boata, Head of Macroeconomic Research ulus to compensate for the weakness of automatic stabilizers. We
expect Europe to reach its pre-crisis GDP level only in late 2022-
Maxime Lemerle, Head of Sector and Insolvency 2023 while China and the U.S. would reach theirs one year earlier,
Research depending on the management of the second wave. The key ques-
Georges Dib, Economist for Latin America, Spain and tion remains the recovery support to come, along with the targeted
Portugal
relief support for the hardest hit sectors until the end of the year.
With higher solvency risks in H2 2020 and 2021, we expect global
Françoise Huang, Senior Economist for APAC insolvencies to increase by +35% in 2020-21.
Patrick Krizan, Senior Economist for Italy and Greece Global trade is not expected to return to pre-crisis levels before
2023 as international flows in the services sector will remain im-
Manfred Stamer, Senior Economist for Emerging paired for longer. We expect a global contraction of trade by -15%
Europe and the Middle East in volume in 2020, with a recovery of +8% in 2021 and +4.1% in
2022. Export losses (USD4.5 trillion in 2020) will also reveal large
Katharina Utermöhl, Senior Economist for Europe
asymmetries between countries and sectors. Service activities will
Selin Ozyurt, Senior Economist for France and Africa take a much longer time to recover (2023 for travel and transporta-
tion services) compared with trade in goods, which is expected to
Jordi Basco Carrera, Fixed Income Strategist return to its pre-crisis level by the end of 2022. We expect the ener-
gy sector to be hit the hardest (-USD733bn of export losses), fol-
Lina Manthey, Equities Strategist
lowed by metals (-USD420bn) and transport services tied with auto-
motive manufacturers (-USD270bn).
“Pavlovian markets” will generate a regime of high volatility. React-
ing to announcements of expansionary monetary and/or fiscal poli-
cy, markets tend to be overly reliant on the effectiveness of policy
measures. We continue to believe global equity is over-valued. For
2020, we expect 10y Bunds to finish the year at -0.5% and 10y USTs
at 1.0%, slightly above current levels.
In the medium term, we expect GDP growth to be impaired by the
legacies of the crisis. We see an accelerating zombification of com-
panies, banks and labor markets, a deterioration of social and polit-
ical risk and definitive losses in terms of capacities of production.
Compared to other developed economies, the U.S. is likely to lose -
1pp over ten years mainly due to a large accumulation of public
debt. While we don’t expect a trade regime shift (relocation/
reshoring) in the short term, pre-Trump tariff levels are unlikely to
return despite reduced U.S.-China trade uncertainty after the U.S.
elections.
2
09 July 2020
Photo by Deva Darshan on Unsplash
-4.7%
Forecasted global GDP
contraction in 2020
3
Allianz Research
LIGHT AND TARGETED LOCKDOWNS TO FIGHT
THE SECOND WAVE OF COVID-19 INFECTIONS
WILL CONSTRAIN THE PACE OF RECOVERY
Back in April, we pointed out the gradu- measures, company investment fiscal Africa: these countries are particularly
al opening of national economies post incentives…). Overall, the global econo- at risk of renewed outbreaks and false
lockdowns, which will prove long and my is operating at 70%-80% capacity restarts as they do not yet have the
cautious. Light and localized lockdowns and we expect this to continue until Q4 pandemic under control. In the U.S. we
are still likely, including border re- 2020 as countries could be forced to expect the recession to be -2pp strong-
strictions and event bans. Policy impose targeted lockdowns to combat er (from the current -5.3%) should the
measures will be balanced between new outbreaks of Covid-19 and to pro- lockdowns fighting the second wave be
targeted relief measures for the hard- long sanitary restrictions until a vaccine more generalized.
est-hit sectors (hotels and restaurants, is developed. Our analysis suggests
food and accommodation, transporta- that many countries still battle a too
tion, leisure) and stimulus measures high effective reproduction rate (R0).
(VAT rate cuts, car scrappage schemes, Hot spots include Brazil, Mexico, the
green stimulus, public investment U.S, India, Indonesia, the UK and South
Figure 1: Deconfining: managing the effective reproduction rate (bubble size is latest
available stringency index as of end of June)
20
Change in average stringency index, June vs.
KOR
10
CHN
0 GBR
DNK USA
BRA IDN
RUS IND ZAF
DEU
May
-10 NLD MEX CZE
SGP TUR FRA JPN
AUT
-20 ITA BEL NOR
ESP
De-confining even
-30 POL though epidemic
may not be clearly
under control yet
-40
0,8 0,9 1,0 1,1 1,2 1,3 1,4
Average effective R0 in June
Sources: Oxford university, Allianz Research
409 July 2020
Figure 2: The phase 2 marathon
Stage 2: Gradual opening Stage 4: Habemus
• Expand healthcare capacity of national economies • Bans on large events & border vaccine!
(treatment, testing, monitoring) restrictions to be eased as pandemics
• Fiscal / monetary safety nets to • Mass testing, tracking & isolation of around the globe ends • Global rollout allows for return to
reduce downside risks & cushion new cases • Ongoing fiscal & monetary policy normalcy without border restrictions,
economic blow • Ongoing targeted confinement support aimed at providing tailwind testing & bans on large events
measures incl. border restrictions & to rebound • Policy support can be gradually
event bans withdrawn
• Policy to focus on boosting economic
recovery prospects
Stage 1: Full lockdowns to Stage 3: Global economy
'flatten the curve' getting back on track
Sources: OECD, Allianz Research from April 2020
Currently high frequency indicators world. Stringency indices have been of 2021 as the earliest, mainly driven by
indicate a slow recovery in countries faster to rise than decline, particularly China and the U.S. Europe will need
where initial conditions were weak and for international travel. Even in areas more time to reach pre-crisis levels,
lockdown stringency the highest. The where lockdowns were not put in place, given the size of the shock — twice as
stringency index in China increased in the stringency index still stood at an high as in the U.S. — and the more lim-
June compared to May (one of only average of 30-40 in Q2 (e.g. Iceland, ited stimulus response. We expect a
two of the main economies in this situa- Sweden, Japan). This shows it will take return to pre-crisis levels only in late
tion), reaching 79 vs. a global average time before we can witness a return to 2022-2023, with France, Italy, Spain
of 66. Between the risk of renewed out- business as usual. We expect global and the UK being the laggards and
breaks and the extremely prudent de- GDP to fall by -4.7% in 2020, more than Germany, the Netherlands and Sweden
confinement approaches, it is likely to three times more than in 2009, and to the fastest-growing economies.
be a long time before all containment grow by +4.8% in 2021. The return to
measures are removed around the pre-crisis levels is expected at the end
Figure 3: Real GDP growth, %
Sources: National sources, Allianz Research
5Allianz Research
MONETARY BAZOOKA:
UNPRECEDENTED BALANCE SHEET
EXPANSION, DIFFERENTIATED RETURNS
Central banks around the world have guidance and large-scale balance intensities of support differ. In the U.S.,
responded quickly and boldly to con- sheet operations. Mirroring this trend, the Eurozone and the UK, the indices
tain the pandemic-relatedcrisis the size of major Central Banks’ bal- have reached the highest levels on rec-
increasing funding and injecting liquidi- ance sheets will increase significantly, ord, while in Japan the index is at the
ty. The whole toolbox of classical and heading towards 50% of GDP in 2020- highest since the early 1970s. In China,
unconventional monetary instruments 21. however, while the index is moving in
is now at work, including lower policy While this scale of synchronized mone- the right direction it is still a far cry from
rates, regulatory flexibility (e.g. collat- tary policy is a first, our proprietary the peaks reached after the 2009 fi-
eral policy, loan forbearance), forward monetary impulse indices show that the nancial crisis.
Figure 4: Monetary impulse indices, pts
20
15
10
5
0
-5
-10
-15 United States Eurozone China
Japan United Kingdom
-20
09 10 11 12 13 14 15 16 17 18 19 20
Sources: National central banks, Euler Hermes, Allianz Research
Going forward, we don’t expect a re- attention will switch to banks in order credit crunch in 2021.
newed bazooka from central banks, to avoid zombification following the The ultra-accommodative monetary
but there will be no change from an expected rise in non-performing loans. policy will keep bond yields at extreme-
extremely accommodative monetary The most vulnerable sectors post the ly low levels. We currently estimate the
policy. The Fed commitment to near Covid-19 crisis already feature elevat- dampening effect of QE for 10y Bund
zero interest rates through 2022 looks ed levels of non-performing loans and yields at -150bp and for 10y UST yields
plausible. The ECB will continue to im- represent a high exposure for banks. at -120bp. This effect will be lasting:
plement its QE & PEPP programs until Against low capital adequacy ratios in Even when net purchases eventually
2021 and its balance sheet will contin- several European countries and deteri- come to an end, central banks will en-
ue to expand until the end of 2021 and orated profitability, addressing NPLs ter a multi-year phase of full reinvest-
beyond. It provided weak forward guid- (for instance via a European bad bank) ment before considering a reduction of
ance (policy pause), but we believe its would help prevent against a potential their bond holdings.
609 July 2020
FISCAL BAZOOKA: PROMPT BUT UNEQUAL
IN SIZE AND MULTIPLIERS. MORE TO COME?
Global fiscal support has amounted to also announced an extension of partial To date we find that the recovery stimu-
USD10.4tn since March 2020 (12% of unemployment schemes, along with lus remains timid, so a return to pre-
global GDP), ranging from 3%-18% of direct loans to the most hit sectors. crisis levels has been delayed by more
countries’ GDP. This along with the size However, we believe much more policy than one year depending on the coun-
of automatic stabilizers will shape the action is required to lower the risk of try. In addition, in the absence of
future recovery trajectories by country. the zombification of jobs and compa- enough stimulus measures, the risk of
Countries such as Germany, the Nether- nies. Without ad hoc policy measures, an insolvency crisis is increasing along
lands, Switzerland and Austria are ex- partial unemployment schemes could with the zombification of companies3.
pected to recover faster, thanks to only postpone mass unemployment1. In Low equity ratios for some companies
higher automatic stabilizers and above addition, a delay in implementing ac- have pushed them into high indebted-
average fiscal support packages. In tive employment policies and reskilling ness since 2009, which has increased to
contrast, countries such as Japan, the will continue to keep uncertainty high new record high levels due to the Covid
U.S., Spain, the UK and Italy need to and feed into the precautionary sav- -19 crisis. This coupled with already
compensate for the weakness of auto- ings of households. We estimate the fragile company margins increases the
matic stabilizers with higher fiscal sup- savings rate in the EU to remain +6pp risk of the zombification of the corpo-
port. above pre-crisis levels at the end of rate sector. We expect global business
As expected, policy support during the 2020, which represents EUR370bn of insolvencies to increase by +35% in
de-confinement period (May-July) has excess savings, or 2.5% of GDP. These 2020-21.
become more targeted, with a shift in excess savings could put a damper on
focus from liquidity support to solvency economic growth2.
support. Several European states have
Figure 5: Direct fiscal spending, % of GDP
Japan
USA
UK
France
Germany
China
Italy
Spain
0,0% 5,0% 10,0% 15,0% 20,0%
Realized fiscal relief package Announced fiscal spending
Expected future recovery stimulus
Sources: Various, National sources, Euler Hermes, Allianz Research
1
See our recent report: The risk of 9 million zombie jobs in Europe.
2
See our recent report: Europe should unlock excess savings from Covid-19 response
2
See our recent report: When Main Street makes it to Wall Street
7Allianz Research
MIND THE INVESTMENT CYCLE:
CONFIDENCE MATTERS
Companies are in a position to increase key. In addition, state guaranteed loans inventories to new orders remains
their investments during the recovery are likely to remain supportive for com- above 1, in some cases voluntary in
phase. Increases in net savings thanks panies which want to increase invest- order to reduce the negative impact
to public support during the Covid-19 ments, similar to recent announce- from continued supply-chain disruption.
crisis and on pause investments have ments in Spain. However, the success of Indeed, these latter are likely to remain
significantly reduced their fixed costs 4. these policies will be dependent on impaired in H2 as long as social dis-
Going further, public support to reduce renewed confidence and a pick-up in tancing and barriers on international
companies’ fixed costs (lower social domestic and external demand. flows of goods and people are main-
contributions, lower corporate taxes Imbalances between supply and de- tained.
and/or fiscal incentives to invest) will be mand prevail even in July. The ratios of
Figure 6: Total investment, y/y
30%
20%
10%
0%
-10%
-20%
-30%
-40%
08 09 10 11 12 13 14 15 16 17 18 19 20 21
UK US China Germany
Sources: National sources, Allianz Research
4
See our recent report: European corporates loading up cash against uncertainty
809 July 2020
GLOBAL TRADE IS NOT EXPECTED TO COME
BACK TO PRE-CRISIS LEVELS BEFORE 2023
In line with our expectations, the vol- export losses at the global level), fol- “reshoring” (“relocation” or “bringing
ume of global trade of goods contract- lowed by metals (-USD420bn) and the production back home”) exists, our
ed in Q1 2020 (-4.8% q/q and -5.4% transport services tied with automotive baseline scenario assumes that policy-
y/y). In April, at the height of the global manufacturers (-USD270bn). With the makers would be talking the talk but
lockdowns: goods trade contracted by recovery of GDP growth, reopening of not walking the walk. We do not expect
-12.1% vs. March, the strongest monthly economies and higher commodity pric- a rapid structural shift in supply-chain
drop ever recorded by the CPB Bureau es, we forecast a rebound in 2021 both dynamics after the crisis, except for the
of Analysis, and by -16.2% vs. April of in volume (+8%) and value (+12%), but medical and food sector. It is not unusu-
last year. The hit to overall trade in Q1 this will be insufficient to compensate al that supply chains make the head-
2020 ought to be even stronger as the for the 2020 losses. lines during a crisis: in fact, during the
pandemic halted transport and travel We estimate it could take until 2022 for three last recessions, mentions of sup-
services. As a result, we maintain our merchandise trade to recover, i.e. a few ply chains and their disruptions in the
forecast of a contraction of trade in quarters after GDP comes back to pre- media peaked. Moreover, we see no
goods and services of -15% in 2020, crisis levels, but even longer for travel strong one-sided case for reshoring.
more severe than in 2009 (-11%). Add- and transport services (2023, in line Shortening supply chains can create
ing the oil and commodity price shocks, with the slow normalization of air trav- resilience, but it is costly in terms of lo-
a stronger dollar and slower global el). Our medium-term assumptions are gistics and labor, which can push up
demand, the negative price effects reduced China-U.S. trade uncertainty consumer prices. Automation also
should bring the trade contraction in from 2021 on but no return to pre- means repatriation of production does
USD value terms to -20% this year, Trump import tariff levels, and no trade not systematically mean job creation.
equivalent to massive USD4.5tn of regime shift in the short-term i.e. no Lastly, reshoring reduces diversification
trade losses. We expect the energy sec- massive relocations and reshoring. and hence increases concentration risk.
tor to be hit the hardest (-USD733bn of In fact, while the risk of
Figure 7: Medium-term trade in value terms (USDtn)
30
25
20 2,5 2,5
2,1
1,8
1,1
15
10 19,3
18,7 18,7
17,0
15,4
5
0
pre-crisis 2020 2021 2022 2023
Goods Travel and transport services Other services
Sources: ITC, Allianz Research
9Allianz Research
MARKETS ARE PAVLOVIAN,
PICKY AND DEFENSIVE
For money markets, a new cycle of in- now reached historical highs. This rush especially in the U.S. Bond and money
terest rate hikes seems to be a long for credit can be attributed to overly markets on their part anticipate a cau-
way off. For all major developed coun- low (because central bank-backed) tious recovery where economies will
tries, they currently price stagnating funding costs, especially in the context remain below potential for some time.
short-term rates at least until the end of of liquidity hoarding and increased risk All in all, we consider the current mar-
2021. As we see the developed econo- of rating downgrades. Despite this ket conditions fragile. We see U.S. equi-
mies recovering from the Covid-19 crisis greater supply, yields and spreads on ty markets as the main source of insta-
only by H1 2022, the current monetary corporate debt have generally de- bility as the decoupling from economic
policy stance will prevail for longer clined even though only a relatively fundamentals has become so strong
since hiking cycles usually start long small proportion of that additional sup- that they are very prone to negative
after markets and economic activity ply was actually bought up by central news flow, especially in a context
have bottomed out. After this brutal banks. For us, this proves “Pavlovian” where the market momentum seems at
recession, we believe central banks will markets are at work. This means that least partially driven by new, volatile
be more cautious than ever when it markets are trusting the central bank to retail investors5 while institutional inves-
comes to monetary normalization. They such an extent that mere announce- tors have been piling up holdings in
might well be inclined to take the risk of ments can move them in one or the money markets funds. So is there a sec-
a temporary inflation overshoot rather other direction. But this extreme reli- ond market correction coming? Again,
than curbing the recovery too early. In ance on central banks might become a divergence is the main pattern here.
this context, yields in developed mar- source of vulnerability, especially in a Daily and weekly indicators (sentiment-
kets are expected to remain on a long- context where the markets for risky as- driven) are showing the market trough
term negative sloping trend. For 2020, sets (esp. equity) and rates exhibit might be already behind us. Structural
we expect 10y BundS to finish the year strongly diverging expectations on the indicators (monthly and quarterly)
at -0.5% and 10y USTs at 1.0%, slightly underlying economic momentum. have not yet shown any signs of rever-
above current levels. While monetary It seems that equity markets are not sal.
policy, in combination with safe asset pricing in the lasting effects of the
demand, has a strongly dampening Covid-19 crisis on the economy. In the
effect on interest rates (stable short- U.S. as well as in Europe, earnings per
term rate expectations due to forward share (EPS) forwards are pointing to a
guidance and compression of the term quick recovery in 2020, followed by a
premium by QE), inflation expectations return to the former growth trend, ig-
could provide some moderate upward noring the risk of the second wave, not
pressure as both U.S. and EUR inflation to mention darkening economic funda-
expectations are currently close to the mentals. The magnitude of the bounce
lower bound of our estimation range. back is spread among various sectors.
With central banks intervening to con- The energy sector is expected to out-
tain spreads on the corporate bond perform all others in 2021. Besides the
markets, both European and U.S. cor- sharp market correction in February
porate bond issuance markets have and March, equities remain expensive,
5
See our recent report: When Main Street makes it to Wall Street
1009 July 2020
IN THE MEDIUM TERM, WE EXPECT GDP
GROWTH TO BE IMPAIRED BY THE LEGACIES
OF THE CRISIS
Further zombification of banks and Economies, social discontent may be ready existing social risks. This could
companies, excessive debt, persistently aggravated by the impact of Covid-19 could worsen the business climate in
high protectionism and high political lockdowns, affecting even those coun- some countries (See Figure 8). There is
risk are likely to negatively impact the tries that have been politically calm in therefore a high incentive among gov-
growth potential of major economies recent years6. People could become ernments to increase the level of debt
over the medium-term. For example, in dissatisfied with weak government re- in order to tame social tensions, which
the U.S., we calculate that the current sponses and/or mismanagement as in turn negatively impacts, alongisde
trajectory of public debt is likely to the economic pain intensifies, and this high uncertainty, the growth potential.
make the economy lose -1pp of its combined with a generally poor health
growth potential over ten years. To this situation, increasing unemployment
regard, political risk plays a key role. In and poverty and rising prices
both Emerging Markets and Advanced (especially for food) could add to al-
Figure 8: Watch list for potential social tensions in 2020-2021
System ic Soc ial R sik A dvanc ed Ec onm ies Em er ging Eu r ope Em er ging A sia Middle East A fr ic a Latin A m er ic a
Signific ant to High Turkey Pakistan Iran Nigeria Venezuela
A N D R ising Bosnia & Herzegovina Sri Lanka Bahrain Angola Mexico
Gabon Colombia
Brazil
Guatemala
Ecuador
El Salvador
Bolivia
Panama
Dominican Republic
Chile
Signific ant to High Russia Indonesia Lebanon Congo (Rep. of the) Honduras
BU T Dec lining Azerbaijan India Uganda Paraguay
Romania Bangladesh Cameroon Argentina
Kazakhstan Vietnam Morocco Peru
Philippines Cote d'Ivoire
Thailand South Africa
China Algeria
Kenya
Senegal
Ghana
Tanzania
Tunisia
Egypt
Low to Moder ate UK Hungary Hong Kong Saudi Arabia Trinidad & Tobago
BU T R ising U.S. Poland UAE Costa Rica
Iceland Kuwait
Belgium Qatar
New Zealand
Luxembourg
Norway
Sweden
Note: 'Significant to High' refers to a SRI below 50.0; 'Low to Moderate' to a SRI above 50.0. 'Rising' and 'Declining' refer to the development of the SRI over the past five years.
In each cell of the table, the countries are ranked from highest to lowest risk according to the SRI.
Sources: Euler Hermes Allianz Research
6
See our recent report: Social Risk index : Structural Determinants of social risk
11Allianz Research
REGIONAL
OUTLOOKS
U.S.: The probability of Trump being re-
elected has declined from 45% to 22.5%
due to the Covid-19 crisis
The U.S. economy entered into 2020 As evidenced by Figure 9, the Covid-19 Regarding fiscal spending, USD3.4tn of
with a -4.7% q/q annualized contrac- crisis plays a very important role in ex- supplementary spending has been an-
tion of activity. We expect the trough of plaining the deterioration of President nounced. To analyze the impact of this
activity to be reached in Q2 2020, with Trump’s re-election prospects. budget proposal (we compare with the
growth possibly declining by -33% q/q The probability of Joe Biden winning CBO’s own projections), we assume
annualized. We have revised our GDP the election is therefore higher now. USD3.5tn of new tax revenues
growth scenario to -5.3% compared According to the Tax Policy Center, Joe (negative multiplier of -0.5) and
with -2.7% before for three main rea- Biden's tax proposals will increase fis- USD3.5tn of supplementary spending
sons, i.e. the delay observed in voting a cal revenue by between USD3.6tn and made up of USD1.3tn in infrastructure
new USD1.5tn infrastructure package, USD4tn between 2021 and 2030. It (multiplier 0.9), USD0.7tn in healthcare
the resurgence of the pandemic in estimates that 93% of the tax increases spending (multiplier 0.6) and USD1.5tn
southern states and higher political would be borne by taxpayers in the top of measures equivalent to social trans-
uncertainty after a wave of protests 20% of households by income. The top fers (student loans forgiven, increase of
related to the death of George Floyd. 1% of households would pay three- minimum wage, lower education fees…
We are still convinced that a U-shaped quarters of the tax hike. Another im- with a multiplier of 0.8). All in all, these
recovery will take place, with U.S. GDP portant feature of Biden’s platform is budget orientations could generate
growth hitting +3.7% y/y in 2021. How- the corporate tax rate, which is ex- USD1tn of revenues for the economy by
ever, should the lockdowns against the pected to increase from 21% to 28%. 2030.
second wave become more general-
ized and long-lasting, we think the re- Figure 9: Probability of being re-elected for the incumbent U.S.
cession could reach more than -7% in
President’s party
2020. In our view, this pandemic repre-
sents a real turning point for the out-
come of the upcoming Presidential
elections. By aggregating deciles of
performances in ten different macroe-
conomic variables, we estimate the
probability of re-election for the incum-
bent President’s party. This model has
had a good track record in explaining
the outcome of U.S. elections since
1960 and suggests that President
Trump now has a 22% of chance of be-
ing re-elected, one of the lowest proba-
bilities in the U.S. history.
Sources: Allianz Research
1209 July 2020
President Trump has proposed USD2tn (including cuts in Medicare and Medi- of any willingness by any candidate to
of supplementary spending in infra- caid). All in all, the multiplier impact on adopt a more conservative stance of
structure and USD800bn of additional the economy is similar to Biden’s option budgetary policy, we expect public
military expenditure, with an extension albeit with radically different redistribu- debt (held by the public), to increase
of the tax cuts implemented during his tive effects. The result would be close in from 80% of GDP to more than 100% of
first mandate (USD1.5tn), which should terms of the evolution of the public GDP at the end of 2021, and 120% of
normally finish in 2025. Large cuts in debt. After record high deficits in 2020 GDP by 2030.
healthcare, education and other social and 2021 (16% of GDP and 10% of
spending would amount USD3.3tn GDP, respectively), and in the absence
Positive policy surprises in Europe, but
the road to pre-crisis levels will be long
High-frequency data confirm that the you will find the UK which will see a In a bold and pre-emptive move, it de-
gradual easing of containment much sharper downturn at -13.3% in livered a significant easing of monetary
measures across Europe from early 2020. Here a return to pre-crisis GDP policy, justified by a sharp downward
May onwards has set the stage for a will take twice as long. correction in its inflation and growth
notable – albeit to a large extent tech- In recent weeks the economic outlook projections. For one, it announced a
nical – GDP rebound in H2 2020. After for Europe has clearly brightened, EUR600bn PEPP expansion, exceeding
all, underlying growth dynamics are thanks to some important policy steps expectations of a EUR500bn boost.
likely to remain sluggish as continued that should provide a boost to the eco- Furthermore, the ECB announced that
sanitary restrictions, lingering conta- nomic recovery and keep a lid on diver- maturing PEPP purchases will be rein-
gion fears, heighted economic uncer- gence, though not eliminating it. The vested until at least end-2022 and that
tainty and the expected uneven global EU has taken an important step to- the PEPP purchase horizon was ex-
recovery will keep a lid on consumption wards more fiscal solidarity: The pro- tended to mid-2021. With these policy
and investment decisions. As a result, posed EUR750bn Next Generation EU decisions, we expect the ECB to remain
Eurozone GDP will only recover to pre- funds should further brighten economic on hold over the summer months until
crisis levels in late 2022-2023. prospects as they will allow for a top- September, when the next round of
While no country was spared from the up of national fiscal responses - with a macro projections are likely to call for a
crisis, the length and strictness of the focus on investment - which will help in reassessment of the policy stance, in-
respective national lockdown, the size particular those economies that are cluding the size of PEPP as well as the
and composition of fiscal stimulus plans most impacted by the Covid-19 crisis. decision on whether the ECB should
and characteristics of individual econo- Our calculations suggest that the fund start to buy “fallen angels” i.e. bonds
mies, such as the importance of the could lift GDP levels by +0.4% per year that lose their investment-grade credit
services sector, set the stage for very until 2025. rating, as collateral. Taken together, in
different recovery prospects across Eu- Meanwhile on the monetary policy our view, these policy steps have the
rope: Among the largest economies, on front, the ECB pulled some new tricks potential to change the narrative of a
the one end of the spectrum is Germa- out of its hat at its June meeting in an Europe that is always doing too little,
ny, with GDP set to decline by -7% in effort to keep a lid on lingering debt too late. Hence, we expect Eurozone
2020 and recover to pre-crisis levels in sustainability concerns and prevent GDP to rebound by +6% in 2021 after -
early 2023, whereas on the other end unwarranted financial fragmentation. 9% in 2020.
Figure 10: Key factors driving short-term economic performance Figure 11: Growth shock vs support from EU recovery fund
Pandemic economic shock and support from the proposed EU recovery tools
Germany France Italy Spain UK 14%
Croatia
Lockdown lengths 12%
6 8 10 10 12 Bulgaria
(weeks) Greece
Lockdown
10%
Max. Financial Contributions (share of GDP)
73 89 87 81 73
strictness* 8%
Latvia
Lockdown strictness
Slovakia
Romania Portugal
439 713 866 806 874 Lithuania
x length 6% Spain Cyprus Poland
Hungary
Fiscal stimulus Italy Estonia
7,50% 6,70% 4,50% 2,50% 5% 4%
(% of GDP) Slovenia
Czechia
Malta
2%
Services France
Belgium
Netherlands
Finland Sweden
Denmark
Austria
Ireland
(% total gross value 69,30% 78,90% 73,90% 74,80% 79,80% 0%
Luxembourg
Germany
-13% -12% -11% -10% -9% -8% -7% -6%
added) Revision in 2020 GDP growth forecast (percentage points, difference between the EC´s Spring 2020 and Autumn 2019 forecasts)
Sources: Oxford University, Eurostat, Allianz Research Sources: European Commission, Allianz Research
13Allianz Research
Germany continues its fiscal splurge
and should recover faster than peers
Following a six-week lockdown aimed while the increase for the Eurozone as dependent German economy are likely
at slowing the spread of the virus, dur- a whole is expected to be more than to be held back by the asynchronous
ing which at times 30% of economic twice as high at +31%. economic recovery in global economic
activity was put on pause, the German But despite occupying the recovery activity and in turn also trade. All in all,
economy spearheaded the deconfine- pole-position, a quick return to following a decline of -7.0% in 2020, the
ment trend from late April onwards. ‘business as usual’ is not on the table. German economy looks set to grow by
Thanks to a relatively short and less Even though private consumption in only +4.5% in 2021. Given the gradual
strict lockdown and an economy less Germany is on course for a V-shaped and drawn-out nature of the recovery,
dependent on services, Germany recovery, thanks to additional tailwind German GDP will only reach pre-crisis
boasts favorable conditions to outper- from the VAT cut and the child benefit levels at the turn of 2022/23.
form most of its European peers. The bonus, prospects for the export-
most notable game-changer, however,
has been Germany’s fiscal response, Figure 12: Fiscal stimulus measures across European countries
which thanks to the decisive and com-
prehensive policy action (almost 35% of Germany: Strong & timely tailwind for the imminent recovery
GDP in public guarantees and higher (fiscal stimulus: announced, expected, unlikely)
fiscal spending) on behalf of the Ger-
DE FR IT ES UK
man government has been key in limit-
ing the economic fallout from Covid-19. Taxes
Thanks to its front-loaded nature, the VAT √ x x x √
recently announced EUR130bn stimu- Income x x x x x
lus package (3.8% of GDP) alone Corporate √ x √ √ √
should add 1pp to GDP growth in 2020 Spending
and another 0.5pp in 2021, with key Household cash transfers √ √ x x x
trade partners likely to profit from posi- Job rentention scheme √ √ √ √ √
tive spillover effects. Germany’s eco- Car scrappage scheme √ √ √ √ √
nomic outperformance explains to a
large extent, why insolvencies here are Vulnerable sector support √ √ √ √ √
likely to rise by only +12% till end-2021,
Public investment √ √ √ x √
Source: Allianz Research
The French consumer has the potential
to support the recovery
France’s GDP is expected to contract by above the Eurozone average (60%). severely affected by the crisis
-10.8% in 2020 before rebounding by Companies were also tight on cash in (construction, accommodation,
+7.4% in 2021. The historic recession in the beginning of 2020: French SMEs transport). The deterioration of the as-
2020 will be mainly driven by the col- only had the equivalent of two months set quality of banks could be problem-
lapse of domestic demand. While in- of turnover in cash on average. To atic for the recovery as banks may start
vestment is expected to fall strongly by cushion the impact of the crisis, French to tighten credit conditions in 2021.
-21.7% (y/y), the decline in consumption companies had to make extensive use However, we do expect activity to re-
will be more moderate (-10.1%). We of treasury loans, in particular based on cover in 2021, thanks to consumers re-
project the public debt-to-GDP ratio to the state-guaranteed loan scheme gaining confidence and the support of
soar to 120.6 % in 2020 (from 98.8% in (PGEs) implemented after Covid-19 hit. the stimulus package that would be
2019) and the unemployment rate to Given the size of the shock and the slow announced by the government.
reach 12.5% (from 8.5%). French com- pace of the recovery, we expect a surge
panies were already in bad shape be- of insolvencies as of the third quarter of
fore the outbreak of the Covid-19. Their 2020. These insolvencies will naturally
debt-to-GDP ratio of 74% was already cause large loan defaults in sectors
1409 July 2020
Italy’s outlook is exposed to several
downside risks
Italy is poised to see a large GDP con- 7% of this amount (EUR42bn) has been great unknown. Third, the Italian bank-
traction of -11.2% in 2020, reflecting called up. The hesitant use of the guar- ing sector remains fragile. Pockets of
both the length and strictness of its anteed credit scheme seems to be vulnerability prevail, notably among
lockdown. With +6.6% growth next linked to the still weak and therefore medium and small regional banks. We
year, the recovery will prove less vigor- risk-averse Italian banking sector. In see a risk, especially for SMEs, that this
ous than previously expected. At the addition, these loans have so far mainly will affect the channeling of state guar-
end of 2021, Italian GDP should still been concentrated on large groups. anteed loans to companies. Finally, we
remain 3% under its pre-crisis level. Italy For the time being, our outlook for Italy still see non-negligible political risks as
entered the crisis in an already weak remains associated with downside risks. the coalition is still notoriously fragile.
position and it will remain one of the There are several reasons for that. First- At the same time, a new dynamic
laggards in the Eurozone on the way ly, with economic uncertainty persisting, emerges on the very right wing with for
out. In response to the Covid-19 crisis, household consumption might recover instance the foundation of a new
the Italian government has put togeth- more slowly. Consumption-related high Italexit-party. On top of this, the crisis is
er a decent fiscal package worth 4.5% -frequency data indicate a rather sub- likely to increase social tensions be-
of GDP. However, it remains biased dued recovery in Italy compared to tween generations due to employment
towards employment protection and other European countries. Secondly, conditions or between regions as in
corporate tax relief. In terms of state- there is great uncertainty about the certain areas mass tourism has become
guaranteed loans, a large envelope of ability of the tourism sector to recover. the almost sole source of income.
a maximum 35% of GDP has been mo- Again, related high-frequency data
bilized. The guarantee level is on aver- point at a very gradual normalization.
age 80%. However, so far only The return of foreigners remains a
Relatively limited fiscal support and
political fragmentation could slow the
recovery in Spain
Sentiment and high frequency data tial in 2021 (+7%). We see two main tum for reforms. A major risk ahead is
suggest that April was the trough of the reasons why Spain is emerging as a the job market, given its duality, flexibil-
crisis but the economy could post a laggard in the Eurozone despite its ity and reliance on the tourism sector
massive contraction in Q2 overall (-19% strong pre-crisis momentum (+2% GDP (12% of employment). The unemploy-
q/q) especially since localized lock- growth in 2019): (i) the direct fiscal re- ment rate could peak at 18.7% in Q1
downs were prolonged in May (Madrid lief package (now around 2.6% of GDP) 2021 after most government support
and Barcelona). Overall, the 2020 re- was amongst the least ambitious in schemes expire.
cession in Spain could be among the Europe; (ii) political fragmentation
most severe in Europe (-11%) and the caused tensions during the crisis, and it
recovery will be gradual and only par could hamper the post-crisis momen-
The UK: Small is the “New Deal”, Brexit-
constrained?
The UK is among the countries with the 3% of GDP are expected to be an- required by the UK only in October,
longest (more than 10 weeks) and nounced until end-2020, but height- increasing the downside risks to the
harshest lockdowns to fight the Covid- ened Brexit uncertainty is just around recovery in H2 2020 and pushing com-
19 sanitary crisis. We expect Q2 GDP to the corner, constraining the govern- panies to prepare for the worst-case
fall by more than -20% q/q. Activity re- ment from announcing a policy bazoo- scenario by stockpiling similarly to
sumption has proved slower than else- ka as soon as this summer. We continue 2019. Hence, we expect GDP growth to
where in Europe as the deconfinement to think an extension of the transition increase by only +5% in 2021 after a
strategy looks more cautious than else- period until at least mid-2021 is likely. recession of -13.3% in 2020, one of the
where. Hence, we don’t expect GDP to In our view, the risk of “no trade deal” at worst in Europe. Business insolvencies
return to pre-crisis levels before H2 end-2020 stands at 20% probability. are expected to rise by more than +40%
2023. Stimulus measures to the tune of However, this extension is likely to be in 2020-21.
15Allianz Research
Emerging Markets: The Covid-19 QE
programs could endanger central
banks’ credibility
The Covid-19 pandemic marked a turn- as a lender of last resort by engaging in in June 2020, versus 1.9% three months
ing point for ‘unconventional’ monetary long-term government asset purchases, before. Thereafter, Poland pursued the
policies in Emerging Markets (EMs). As if needed, and a few have since done most active “QE” (around 4.2% of GDP
the pandemic induced investors’ panic so. Foreign investors responded quite to date). In contrast, the U.S Fed and
in March 2020, EMs experienced un- favorably to these announcements, the ECB, for example, have been much
precedented capital outflows which helped to restore the liquidity of more active and increased their total
(USD88bn) that dramatically destabi- the markets and stabilize the govern- balance sheets to around 40% of GDP
lized their sovereign bond markets. The ment bond yields. So far these QE-like currently. Another difference from Ad-
fire sales of foreign investors particular- monetary policies of EMs have been vanced Economies is that EMs an-
ly hit countries where they hold a sig- confined to small-scale purchases, nounced their government asset pur-
nificant share of the local currency sov- mostly on the secondary market (see chase programs at a time when they
ereign debt. For instance, this share is Table 1). Turkey is the outlier, having still had room to follow conventional
close to 40% in Czechia, Indonesia and purchased government securities monetary policy by lowering policy
South Africa. Against this background, equivalent to around 9.4% of GDP since rates.
some EM central banks announced end-March. These securities represent
that they were ready to step in and act 11.3% of the central bank’s total assets
Are EMs playing with fire?
These long-term government asset pur- market – and jeopardize the ”hard- we believe that Indonesia, which has
chases need to be implemented in a earned” monetary policy credibility. In already purchased government bonds
temporary manner with a clear frame- that case, de-anchoring of inflation on primary markets, as well as Turkey,
work. Otherwise, the short-term relief expectations and strong currency de- Poland and Croatia, which have con-
on local-currency debt markets can preciations may impair the ability of a ducted the largest purchases (as share
become counter-productive to attract, government to continue to borrow in of GDP) among EMs, are potentially
over the medium term, the resumption local currency. Moreover, in countries playing with fire. South Africa and Hun-
of international capital inflows. Moreo- highly indebted in foreign currencies, gary also require close monitoring ow-
ver, systematic bond purchases by a QE can bring about bigger problems ing to their relatively high shares of
central bank can open the door to debt by putting debt sustainability and the foreign-owned local government
monetization – especially if purchases private sector’s balance sheets at risk bonds and/or total FX-denominated
are conducted directly on the primary (e.g. Turkey). Against this background, debt (see Figure 13).
Figure 13: Government bond purchase programs in EMs
Source: Allianz Research
1609 July 2020
Several indicators already point to a
recovery in China, although it is likely to
remain uneven in the short term.
High frequency indicators suggest that and construction are rebounding more cial focus on micro and small enterpris-
economic activity has been operating quickly. Although it avoided setting a es. Policymakers will continue to roll out
at 95% of usual levels in June. The re- growth target for 2020, the Chinese reforms to make the country attractive
covery in the manufacturing sector may leadership has emphasized employ- externally, with the negative list for for-
be capped in the short term by sub- ment as a priority. Policy support is eign investment shortened again at the
dued private consumption (due to low- turning more aggressive to safeguard end of June. Overall, we expect GDP
er consumer confidence and disposa- jobs. We estimate that fiscal stimulus in growth at +1.5% in 2020 and +7.6% in
ble income) and global trade being 2020 will amount to 7.1% of GDP 2021 (after +6.1% in 2019), as long as
under pressure (as China’s trading part- (compared with 5.7% over 2018-19). downside risks do not materialize.
ners exited Covid-19-related lockdowns monetary policy has also become more These include the risks of new Covid-19
later). On the positive side, policy- accommodative (although a far cry outbreaks and rising protectionism (e.g.
driven sectors such as infrastructure from the post-GFC impulse), with a spe between the U.S. and China).
Figure 14: Unemployment rate in China, %
6,2 45
6,0 Unemployment rate %
50
5,8 CKGSB survey - Recruitment index, smoothed,
7-month lead (rhs, rev) 55
5,6
60
5,4
65
5,2
70
5,0
4,8 75
4,6 80
12 13 14 15 16 17 18 19 20 21
Sources: Wind, Euler Hermes, Allianz Research
In Asia-Pacific, we now expect aggre- particular, a pandemic not yet under scenario that the implementation of
gate growth for the region to decline to control means that activity resumption the national security law will not mate-
-1.3% in 2020 (down from -0.6% ex- could be even slower than in other rially impact Hong Kong’s business en-
pected in April, and compared with economies, and could also imply the vironement. On the positive side in the
+4.3% in 2019). This downwards revi- risk of new virus outbreaks. The policy Asia-Pacific region, we have revised up
sion is driven mainly by lower GDP leeway is limited by twin deficits and a 2020 GDP growth forecasts for econo-
growth forecasts in India (-3.3% ), Indo- vulnerable financial system. In Hong mies that have experienced looser
nesia (-1.5%), Thailand (-6.0%), Hong Kong, protests resuming faster than and/or shorter lockdowns than initially
Kong (-5.9%) and Singapore (-5.1%). previously expected in the context of a expected. That is the case for Australia
The changes are due to stricter and/or pandemic will further delay the eco- (-4.3%), New Zealand (-4.8%), South
longer lockdown measures to contain nomic recovery (e.g. in the tourism and Korea (-1.5%) and Taiwan (-0.3%).
the pandemic, and sometimes under- retail sectors). The U.S. potentially im- These economies could also be sup-
whelming policy responses to lead the posing the same tariff hikes on Hong ported by the comparatively earlier
economy towards a recovery. Idiosyn- Kong as the ones applied on mainland recovery of the Chinese economy.
cratic factors are also at play. In India, China over 2018-19 should have a lim- Trade data show Asia-Pacific exports to
despite the significant cut in our fore- ited impact (less than 1% of Hong Kon China outperforming those to the U.S.
cast, risks remain on the downside. In GDP). At this stage, we keep the central or the Eurozone.
17Allianz Research Latin America is a laggard overall, but the crisis exacerbates regional differ- ences The region will emerge as a laggard, at work and the credit crunch is avoid- uncertainty index is at a three-year but the crisis should also accelerate the ed for now, yet we believe it will not be high. The crisis and its emergency fund- divergence between countries that had sufficient to avoid massive employment ing needs rendered previous fiscal favorable initial conditions (low debt losses and insolvencies in the region. efforts obsolete. Political gridlock risk is ratios, sound business environment, Last March, we anticipated the reces- higher than ever, and even the likeli- etc.) and the others. All major countries sion in Brazil and high number of insol- hood of impeachment after the crisis is will fall into a deep recession as we vencies and expressed doubts about rising, which could prolong the down- revise our 2020 regional forecast the administration's ability and willing- turn. downwards from -4% to -6.5% and pro- ness to manage the crisis. We now fore- ject a modest 3% rebound in 2021. This cast the deepest yearly contraction in is due to a more severe spread of the Brazil’s history (-7%). As of June, despite pandemic than projected in March, the reopening, confidence has barely and stringent and/or prolonged lock- recovered and activity is still 26% below downs. Yet Peru, Uruguay or even Co- pre-crisis levels, which signals a slug- lombia to a lesser extent should proba- gish recovery. Localized lockdowns are bly emerge with fewer vulnerabilities still possible. Second, Brazil’s vulnera- and a better momentum than Brazil bilities lie in its political and social risk, and Mexico. For the region, stimulus is which is on the rise: the economic policy Emerging Europe: unequal policy sup- port to continue over the next two years In the Emerging Europe region as a Slovenia and the Baltic countries will al countries’ dependence on exports whole, annual real GDP is forecast to benefit from their Eurozone member- and tourism, will determine the depth contract by -5.3% in 2020, followed by a ship. Russia has cut its policy rate to a and length of the recessions. Poland moderate recovery to +4% growth in record low 4.5% but is reluctant to use should reach its pre-crisis level of GDP 2021. By and large, the curves of Covid- its large sovereign wealth fund assets at the end of 2021, Czechia and Turkey 19 infections have flattened in most massively to stimulate the economy, in mid-2022 and Russia only in 2024, countries of the region for now, and keeping them as a last resort in case of mainly due to its overall lower growth lockdowns are gradually being eased. need. Less room for policy manoeuver- regime. At the same time, monetary policy ac- ing is available in Turkey, Ukraine, Ro- commodation and fiscal stimulus have mania and Hungary, which will remain supported the economies, albeit to di- the higher risk economies in the region. verging degrees as there is uneven In particular, the Central Bank of Tur- room for policy leeway. We expect the key’s purchase of government bonds unequal policy support to continue over on the primary market (1.1% of GDP), the next two years. Czechia and Poland along with the burning of 30% of its FX are expected to stimulate the most. reserves through massive intervention Both have announced large fiscal stim- in currency markets to stabilize the TRY, ulus programs and lowered monetary bears the risk of raising inflation, further policy interest rates close to zero. The deteriorating investor confidence and Polish central bank has also purchased triggering another balance-of- a noteworthy amount of government payments crisis, just two years after the bonds (equivalent to just over 4% of previous one. In the medium term, the GDP to date) on the secondary market uneven room for policy manoeuvering to ensure a smooth functioning of bond combined with differing momentum at markets. Meanwhile Slovakia, the start of the crisis, as well as individu- 18
09 July 2020
The triple shock of Covid-19 in the Mid-
dle East will have long-lasting effects
In the Middle East region, the triple and output crisis will result in huge ex- Another result is that fiscal and current
shock of Covid-19, the oil price slump in port losses in the oil-exporting coun- account deficits will widen sharply in
H1 2020 and the response to the latter tries. For example, these losses are the GCC countries in the next two years.
– oil output cuts began in May – will hit forecast at more than -USD100bn in This is still manageable for Saudi Ara-
exports and growth hard, in particular 2020 in both in Saudi Arabia and the bia, the UAE, Qatar and Kuwait, which
in the hydrocarbon-dependent econo- UAE. And only one fourth of these short- have ample FX assets in their SWFs.
mies. Stringent confinement measures falls will be regained in 2021. As a re- But it will be a problem for Bahrain and
against the spread of Covid-19 are be- sult, annual real GDP in the Middle East Oman, whose reserve assets are much
ing eased only very gradually, impact- as a whole is projected to decrease by - smaller and which therefore face in-
ing domestic demand and tourism rev- 6.8% in 2020, followed by only a mod- creasing country risk.
enues markedly. Moreover, the oil price est recovery to +2.2% growth in 2021.
Covid-19 crisis puts debt sustainability
at risk for several African countries
In 2020, African GDP is expected to (-3.9) and Morocco (-3.9). South Africa Angola, Egypt, Tunisia. In 2021, we pro-
contract by -3.1%, which will be the first is expected to go through one of the ject Africa’s GDP to rebound by +4%,
recession on the continent in 25 years. sharpest recessions on the continent (- with the support of stronger global de-
The strongest contractions will be seen 7.8%) as a result of an unprecedented mand, higher commodity prices and
in oil-exporting countries such as Nige- demand shock (internal and external) resuming tourism activity.
ria (-3%), Angola (-4.7%) and Algeria and capital outflows. The Covid-19 cri-
(-6.7%). Restrictions on tourism will sis also will put debt sustainability at
affect growth dramatically in Tunisia risk in highly indebted countries such as
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