Global growth slowed throughout 2019 to 3.0%, down from 3.7% in 2018. However, this more stable environment, supported by the counter-cyclical economic policies announced last year and the reduction in trade tensions, has changed since March 2020 as a result of the COVID-19 pandemic. To contain this health crisis, most countries have put in place strong social distancing measures. At the time of publication of this report, it is unclear how long these will last for and how quickly they will be relaxed. However, they will undoubtedly have a severe impact on activity through the supply, demand and financial channels, despite the economic stimulus measures announced.
Therefore, a severe global recession seems inevitable in 2020, although the level of uncertainty on around the forecasts is very high. BBVA Research's baseline scenario works on the assumption that the confinement measures will generally last for about six weeks, and that they will be relaxed slowly to prevent new waves of infections. This will result in a sharp contraction in activity in the first half of 2020 and a rebound in the third quarter, but which will not be sufficient to compensate for the previous decline. The economic policy measures should prevent a deeper recession and support a partial recovery in 2021. However, the forecast is that the global GDP will shrink by about 2.5% in 2020, and that it will rebound to about 5% in 2021, although the risks for these forecasts are on the downside.
In terms of economic policy, the stimuli in the major economies have generally been large and have been adopted relatively quickly. In the United States, a significant fiscal package of about 12% of the GDP has been announced to cover health expenditures and mitigate the effects of rising unemployment through financial support to households and businesses. The Federal Reserve (hereafter the Fed), for its part, has cut interest rates by a total of 150 basis points in March to around 0%-0.25%, relaunched its program of quantitative easing, and put in place credit and liquidity facilities (up to USD 2.3 trillion, which represents 11% of the GDP).
In Europe, the member states of the European Union (EU) are implementing support packages aimed at guaranteeing credit for businesses, along with discretionary fiscal stimuli as a supplement to the automatic stabilizers. Despite differences between countries, at an aggregate level the fiscal stimulus would account for about 2% of the EU’s GDP, and the liquidity facilities would account for 15%. These national measures are supplemented by the approval of a supranational emergency package of about 4% of the GDP to cover healthcare costs, implement a framework to support employment and increase the funds available from the European Investment Bank to support funding for companies. For its part, the European Central Bank (hereafter the ECB) will make purchases of assets for the value of €1,050 billion (8% of the GDP) until the end of 2020, after approving a new extraordinary program (Pandemic Emergency Purchase Programme or PEPP) of €750 billion and increasing the Expanded Asset Purchase Programme (APP) by €120 billion, which is in addition to the monthly purchases of €20 billion. Moreover, the European monetary authority has adopted temporary measures to support the liquidity of the banks, especially by relaxing the requirements for the collateral accepted in their transactions, and has acted in a coordinated manner with the Fed for the supply of US dollars.
In this context, interest rates will remain low in the major economies for a longer time than previously anticipated, while many emerging countries have recently cut interest rates to mitigate the effects of the pandemic.
As for the banking system, in an environment where much of the economic activity is paralyzed, banking services are of fundamental importance for three reasons: first, families and businesses need to make payments and authorize charges to maintain activity; second, a new loan or the renewal of a maturing loan can help families and businesses manage the shock to their income. In the current situation, it is very important to ensure that the temporary liquidity problems faced by companies do not become solvency problems, thus jeopardizing their survival and the jobs they create. To this end, the support provided by banks and public guarantees is essential. Third, banking has become the only source of financing for most companies in light of the turbulence on the financial markets.
While in profitability terms the European and Spanish banks are still far from the levels seen before the financial crisis, due mainly to the low interest rate environment we have been experiencing for some time now, the financial institutions are facing this challenge from a position of financial strength since their solvency has been constantly improving since the 2008 financial crisis, with increased capital and liquidity buffers and therefore a greater capacity to lend.
In terms of growth, the most recent activity-level data, along with the deterioration of the labor market, indicate that the emergence of the pandemic earlier this year has suspended the signs of stabilization that had led to its GDP growth in 2019, of about 0.4% quarterly, which was above the growth rates in the rest of the Eurozone. To face this situation, the government launched various support measures amongst which the program of credits with public guarantees, the employment protection and the deferment repayment for the most vulnerable ones stand out. The hibernation of the economy following the strong confinement measures adopted in mid-March will result in a sharp reduction in the capacity being utilized by the economy and a fall in demand in the first half of the year. This will be reflected in a fall in the GDP of around 8% in 2020, according to BBVA Research estimates. However, a gradual recovery of the economy is expected in the second half of 2020 following the lifting of the confinement, although some sectors and demand segments, such as construction and tourism, may be affected for a longer time. In 2021, the economy is expected to only recover partially growing at a rate of slightly below 5.7%. The uncertainty surrounding the forecasts is high and depends mainly on the evolution of the pandemic, the duration and intensity of the isolation measures, and the effect of the extraordinary economic policy measures being taken.
The United States
The COVID-19 outbreak has created a combination of supply and demand shocks that, although transitional, were already having a significant economic impact at the end of the first quarter, with a sharp reduction in utilized capacity and an unprecedented increase in people applying for unemployment benefits. According to BBVA Research forecasts, the GDP will fall by about 4.4% in 2020, before seeing an increase of around 3.4% in 2021. The risks for this scenario are on the downside. Uncertainty about the economy over the coming quarters is very high due to the ongoing scarcity of data, the volatility of the financial markets and the possible effect of the unprecedented economic policy measures adopted, both fiscal and monetary. In this regard, we expect the Fed to hold rates at 0% at least until the end of 2021 and remain prepared to take further action if necessary, while it is also possible that a new infrastructure spending tax package will be approved.
The latest figures suggest that activity continued to stagnate in the first months of 2020, although the fall in industrial production and investment points to a gloomier scenario, especially because, in the face of the pandemic, there is not enough fiscal space for economic policy measures to compensate for the negative effects on the economy. In this context of a sharp moderation in demand, inflation has unexpectedly declined to 3.3% in March, and a greater reduction is forecasted for the remainder of the year. On March 20 and April 21, 2020, Banxico cut the benchmark interest rate for a total of 100 basis points, to 6.0%, and is likely to continue making cuts, causing it to fall below 5% by the end of the year. In addition, Banxico announced an unprecedented program of measures to promote a controlled behavior of the financial markets, strengthen the channels for granting credits and provide liquidity for the development of the financial system. The measures announced for the moment amount to 3.3% of the GDP. Likewise, the Mexican banks have offered deferments of payments up to four months and payment facilities to allow clients to cope with their obligations. There is great uncertainty about the evolution of the economy in the coming months, but the Mexican economy could be one of the most affected in the region because of its close relationship with the United States economy, in addition to the adverse effects related to internal uncertainty, the lack of fiscal stimuli seen so far and weak oil prices. In this context, rating agencies have revised Mexico’s long-term sovereign rating in foreign currency. Namely, Fitch announced on April 15th a downgrade from “BBB” to “BBB-“, maintaining a stable Outlook and Moody’s did the same on April 17th by revising it down from “Baa3” to “Ba2”. According to BBVA Research estimates, the GDP could fall by about 7% in 2020.
After the strong recovery in activity in the second half of 2019, growth was showing some signs of moderation at the end of the first quarter of 2020, with a reduction in confidence and utilized capacity. In the face of the COVID-19 outbreak, the Turkish government has taken partial confinement measures and announced a program of fiscal measures equivalent to 1.5% of the GDP to fight the effects of the pandemic. The main measures that stand out include the increase in the minimum pension and financial support for the worst affected households, the protection of employment through providing more flexibility in the rules on short-term labor subsidies and the postponement of the payment of taxes in certain industries. The central bank has cut the reference rate in several monetary policy meetings, in the latest reducing it by 100 basis points to 8.75% from 12% at the end of 2019, all of this in addition to the measures announced to provide liquidity through long-term instruments and discount rates. BBVA Research forecasts that the reference rate will reduce to 8% as from May, given the perspective regarding inflation, which could stand at 7.5% at the end of the year according to the latest forecasts. Public banks have granted a three-month deferment in the repayment of bank loans to companies affected by the crisis. According to BBVA Research forecasts, the economy could stagnate in 2020 before returning to more robust growth of around 5% in 2021.
The recession seen in the Argentine economy since the middle of last year has been exacerbated in early 2020 by the negative impact on economic growth due to the confinement measures put in place in order to contain the health crisis caused by the COVID-19. To offset the negative impact, the government has announced a series of fiscal measures of about 2.8% of the GDP. This will have a direct cost to the Treasury of at least 1.6% of the GDP, as the rest will be financed through the banking system. It has also imposed the postponement of all capital and interest payments in accordance with local legislation until the end of the year, while debt obligations to other public bodies will be automatically extended with new bond issues. According to BBVA Research forecasts, the GDP could contract by about 6% in 2020 and will grow by around 1.5% in 2021, although there is still a great deal of uncertainty.
After the good performance of 3.3% growth in 2019, up from 2.5% in 2018, the figures available early in the year were already showing certain moderation and they have deteriorated sharply since mid-March because of the impact of the pandemic and the fall in oil prices. In addition to the mandatory confinement, a number of measures have been taken to counter the effects of the pandemic. With regard to monetary policy, the central bank has cut the interest rate by 50 basis points to 3.75% and adopted measures to inject liquidity, amongst them, the one destined to provide US dollars with the help of the facility maintained with the Fed (FIMA Repo Facility). However, the BBVA Research scenario foresees a fall in the GDP of around 3% in 2020 and a strong recovery in 2021 (4%). In return, the announced economic measures and low oil prices will result in a weakening of the public finances. This has led Fitch to revise the rating for government debt down to “BBB-”, with a negative outlook, which could increase the pressure to obtain external financing.
Following the slowdown in the economy in 2019 (2.2% after 4% in 2018), the rebound in growth in January (3% year-on-year) was cut short as a result of the COVID-19 epidemic. Containment measures have been adopted to tackle this. The government has announced a comprehensive package of measures of up to 12% of the GDP that will be used to finance pandemic-related expenditures, support the labor market and guarantee loans, as well as to underpin the recovery once the health crisis has been overcome. Among these measures, the creation of a universal family allowances, from which a total of 6.8 million families (75% of the total) will benefit, and a new tax on the highest incomes has been announced to try to mitigate the negative effects of COVID-19. In this context, and with the inflation located within the target range (1.8% in March), the central bank reduced interest rates by 200 basis points between March and April to 0.25%, while it has reinforced the message that it is prepared to provide greater monetary stimuli if necessary. However, BBVA Research forecasts consider that the GDP will fall by around 6% in 2020 and partially recover in 2021 with a growth rate of around 5%, although there is still much uncertainty and the risks are on the downside.
Interest rates (Percentage)
|Oﬃcial ECB rate||0.00||0.00||0.00||0.00||0.00|
|Euribor 3 months (1)||(0.42)||(0.39)||(0.42)||(0.33)||(0.31)|
|Euribor 1 year (1)||(0.27)||(0.26)||(0.34)||(0.19)||(0.11)|
|USA Federal rates||0.25||1.75||2.00||2.50||2.50|
- (1) Calculated as the month average.
Exchange rates (Expressed in currency/euro)
|Year-end exchange rates||Average exchange rates|
|Argentine peso (1)||70.6330||(30.7)||(4.7)||-||-|
- (1) According to IAS 29 "Financial information in hyperinﬂationary economies", the year-end exchange rate is used for the conversion of the Argentina income statement.