The Global economy is being severely affected by the COVID-19 pandemic, which has spread to most countries around the world and is affecting their economies in stages due to the lockdown measures, that restrict business, and impact consumer and business confidence. Although many countries in East Asia and Europe now seem to be over the worst of the pandemic and have reopened their economies, it is still spreading in much of the American continent. Governments and central banks have generally implemented fiscal and monetary stimulus measures, which are helping to mitigate the economic impact, but this will not prevent the global economy from entering in a recession throughout the year.
During the second quarter of 2020, the financial markets have generally remained stable due to the actions of the central banks in the developed countries (announcements of asset purchases, lending facilities, interest rate reductions) and various fiscal stimulus packages announced by governments. In addition, the relaxing of the lockdown taking place in most countries and the corresponding upturn in economic activity have contributed to improving economic confidence and activity. With respect to the latter, the indicators generally show that the contraction until April was sharper than expected, but that the improvement since May has been robust and relatively widespread, especially in the developed economies where support through the policies has been more significant and effective.
In terms of global growth, BBVA Research expects a V-shaped recovery in economic activity, although without reaching pre-crisis GDP levels. This recovery will be slower than expected and will vary across the different regions. BBVA Research's baseline scenario is based on the assumption that there will be further waves of infections until a vaccine or treatment for COVID-19 becomes available, without it resulting in strict lockdown measures. As a result, growth forecasts have been revised downward in 2020 and upward in 2021, with a higher cumulative loss of GDP over the two-year period, especially in emerging countries. More specifically, BBVA Research has adjusted its global growth forecast from -2.4% to around -3.1% in 2020 and from 4.8% to 5.1% in 2021. However, one should keep in mind that epidemiological, economic, financial and geopolitical factors will lead to uncertainty remaining at exceptionally high levels and this will be a source of risk to economic forecasts.
With regard to the banking system, in an environment in which much of the economic activity has been at a stand still for several months, banking services have played an essential role, fundamentally for two reasons: first, the banks have ensured the proper functioning of collections and payments for households and companies, thereby contributing to the maintenance of economic activity; second, the granting of new lending or the renewal of existing lending has reduced the impact of the economic slowdown on households and business incomes. 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. As a result, the support provided by the banks during the months of lockdown and the public guarantees have been essential, as the banks have been the only source of financing for most of the companies.
Although in terms of profitability, European and Spanish banks are still far from the levels seen before the crisis, due mainly to their accumulation of capital and the low interest rate environment we have been experiencing for some time now, the financial institutions are facing this challenge from a healthy position since their solvency has been constantly improving since the 2008 crisis, with increased capital and liquidity buffers and therefore a greater capacity to lend.
In Europe, fiscal stimulus packages continue to be implemented by all the relevant European authorities, the European Union (EU) and the Member states. There are two broad sets of measures: lending guarantees and new fiscal stimulus. On average, the fiscal stimulus, plus the liquidity facilities, could represent about 20% of EU GDP. Most importantly is the approval of the recovery fund ("Next Generation EU") approved by the EU with an endowment of €750,000m (5.4% of EU GDP) to support the recovery in the coming years after COVID-19 through the promotion of investment and the implementation of structural reforms. For its part, the European Central Bank (ECB) has continued to expand its balance sheet, consolidating a strong increase in liquidity (TLTRO III), and has ensured the correct transmission of monetary policy in the Eurozone by increasing the special quantitative easing program, the Pandemic Emergency Purchase Program (PEPP), by an additional €600,000m, up to €1.35 trillion. In terms of growth, the longer lockdown period, together with a gradual relaxing of such measures, have led BBVA Research to revise growth in the Eurozone downward to -8.5% in 2020, with a range between -7% and -11%, driven by the collapse of both private consumption and investment in a context of falling global demand. Accommodative economic policies should avoid more persistent negative effects and underpin a partial recovery in 2021 (up 5.8%, with a range between 3.5% and 7.5%), with GDP at the end of the biennium 2020–21 being around 2% below the level seen in the fourth quarter of 2019.
In terms of growth, according to BBVA Research estimates, Spanish GDP could contract by 11.5% in 2020 (with a range between -10% and -15%) and grow by 7% in 2021 (with a range between 3% and 9%). The lockdown and social distancing measures implemented have lasted longer than expected, and the impact on economic activity has been significant and greater than originally estimated. Thus, while the easing of restrictions has led to a sharp recovery in the economy since May, the cumulative decline in activity levels between the end of 2019 and the end of the first half of 2020 could exceed 20%. However, these growth forecasts remain subject to a high degree of uncertainty. First, because they depend to a large extent on the global evolution of the pandemic, which will determine global demand and consumption and investment decisions. Second, because while the temporary effects of the extraordinary economic policy measures adopted so far are clearly positive, there is also uncertainty about their effectiveness.
In regards the banking system, according to Bank of Spain data, the total volume of lending to the private sector recovered slightly in May 2020 (up 2.0% year-on-year) as a result of the growth of new business lending transactions since mid-March, within the framework of the public guarantee programs launched by the government to deal with COVID-19. Asset quality indicators have improved slightly (the NPL ratio was 4.73% in May 2020). Profitability turned negative in the first quarter of 2020 due to the significant impact of the increase in provisions as a result of the coronavirus crisis and the extraordinary negative results in the quarter. In addition, the low interest rate environment keeps profitability under pressure. The Spanish institutions maintain comfortable levels of capital adequacy and liquidity.
The United States
The consequences of coronavirus are resulting in a number of strong supply and demand shocks in the economy of the United States. In principle, the direct economic impact should be large, but temporary. However, the side effects of the financial shock and the fall in activity on the real economy could have deeper consequences and entail a slower recovery. Moreover, limited data availability, financial-market volatility, and unprecedented economic and monetary policy responses imply heightened uncertainty about the economic outlook over the coming quarters. According to BBVA Research forecasts, GDP will fall by about 5.1% in 2020 (with a range between -4% and -7%) and increase by around 3.5% in 2021 (with a range between 2% and 5%). The United States government has launched a strong fiscal stimulus (around 18% of GDP) that entails a substantial increase in the deficit and government debt. In addition, the Fed is expected to hold rates around 0% until at least the end of 2021 and remain willing to take additional measures, if necessary, to support liquidity and asset purchases.
In the banking system as a whole, the most recent activity data provided by the Fed (June 2020) show the effects of the programs launched to deal with the coronavirus, with year-on-year lending and deposit growth rates for the system at 8.7% and 21.4% respectively. NPLs remain under control, with the NPL ratio standing at 1.52% in the first quarter of 2020.
According to BBVA Research forecasts, a sharp contraction is expected as a result of the COVID-19 crisis and a slow recovery afterwards, in a context of weak investment. The BBVA Research GDP growth forecast is for a fall of 10% in 2020, with a range between -12% to -9%, and a partial recovery in 2021 with a growth of 3.7% (in the range of 2% to 4.5%). Recovery will be slow and not without risks. The crisis will have severely affected employment and household income; nearly one million formal jobs have been lost in the first half of 2020, implying a significant decline in private consumption. A 20.5% contraction in investment is also forecasted for 2020. The United States-Mexico-Canada Agreement (USMCA) entered into force on July 1st. This new treaty represents a significant medium-term opportunity for Mexico to attract foreign investment flows and develop local supply chains. In the context of the sharp fall in GDP, BBVA Research estimates that inflation will remain under control, paving the way for Banxico to continue to reduce benchmark interest rates, which could be at around 3% by the end of the year, down from their current level of 5%.
The banking system continues to grow year-on-year. According to CNBV data as of May 2020, lending and deposits grew by 7.7% and 13.8% year-on-year respectively, with increases in all portfolios. The NPL ratio remained under control (2.41% in May 2020, compared to 2.16% 12 months earlier) and capital indicators were comfortable.
As for Turkey, BBVA Research expects GDP to remain stable in 2020 (growth 0%), and then increase by 5.0% in 2021. The Turkish economy grew at an annual rate of 4.5% in the first quarter of 2020 and is estimated to contract 7.1% in the second quarter. However, BBVA Research considers that the expansionary fiscal and monetary policies, as well as the support measures and the acceleration of lending growth, coupled with the expectation of the relative normalization of international activity, will have a positive effect on economic activity in the second half of the year. This will not, however, be free from risks, so the estimated forecast range is between -3% and 1%. The central bank cut interest rates to 8.25% at the May meeting due to the easing of the monetary policies in the advanced economies and the increase in downside risks for economic activity, and retained the investment support measures in certain sectors. BBVA Research estimates that the benchmark rate will remain at 8.25% for the rest of the year. For its part, this pressure on the Turkish lira began to diminish with some normalization of the world economy following the measures taken as a result of the pandemic.
With data as of May 2020, the total volume of lending in the banking system increased by 24.1% year-on-year (up 33.8% in Turkish lira and 10.0% in foreign currency). These growth rates include the effect of inflation, which was 11.4% year-on-year as of May 2020. The NPL ratio stood at 4.54% at the close of May 2020.
BBVA Research estimates that growth will contract this year by between 13% and 16%, with a point estimate of 14%, and that there will be a partial recovery in 2021 with an expansion of between 3% and 6% (point estimate of 5.2%). Argentina was already experiencing one of the longest recessions in its history when the outbreak of the COVID-19 epidemic occurred. With one of the earliest and longest lockdowns on the continent, BBVA Research expects a very severe impact on the economy, which will continue to experience significant vulnerabilities in the years to come. Quarantine extensions have been accompanied by government fiscal support, now targeting certain sectors and regions. Financing the fiscal deficit through the central bank poses an inflation risk in the medium term, so BBVA Research considers as a working hypothesis that the government will reach a successful re-negotiation agreement with creditors.
In the banking system, the positive trend for both lending and deposit growth has continued in 2020, although notably influenced by high inflation. With data as of April 2020, profitability indicators deteriorated significantly (ROE: 18.9% and ROA: 2.8%) due to the COVID-19 effect, after reaching historical highs at the close of 2019. For its part, the NPL ratio fell slightly to 5.3% in March 2020.
Production and consumption disruption resulting from the COVID-19 pandemic has resulted in strong reductions in the components of demand, mainly consumption and investment, in the second quarter of the year, a period in which the contraction of the economy reached 17% year-on-year. The opening of the economy is not uniform neither in terms of sectors of activity nor regions of the country, so we estimate that the recovery will be very gradual and slow from the second half of the year. For 2020, BBVA Research estimates a 7.5% (with a range between -5.5% and -10%) annual contraction with significant declines in consumption and investment. For 2021, BBVA Research estimates a partial recovery with a significant comparison basis effect. This recovery is expected to be slow due to the need to reallocate resources, high business failure rates and the loss of household income. In this context, the central bank has reduced the benchmark interest rate by 175 basis points since the start of the pandemic, an approach which is expected to continue until it falls to 2% (from its current 2.5%) for the third quarter. It has also carried out liquidity injection programs in the economy in addition to bond purchase programs. The scenario for 2020 and 2021 is still very uncertain, both on the epidemiological side and in terms of the effects on the economy of the gradual opening. This is despite the government's efforts to relax the Fiscal Rule that has been suspended for this year and the next, in order to expand measures to support the economy. BBVA Research estimates that the government deficit will be around 8.2% of GDP in 2020.
Total lending in the banking system grew by 11.8% year-on-year in April 2020, due to the high growth in the corporate portfolio driven by government-approved letters of credit and guarantee programs during the pandemic, with a 4.3% NPL ratio. Total deposits increased by 18.3% year-on-year in the same period.
BBVA Research estimates that Peru's GDP has contracted by an annual rate of slightly more than 30% in the second quarter of 2020, mainly as a result of the measures taken to limit the spread of COVID-19. For 2020 as a whole, a contraction of about 15% is estimated, with a range of between -18% to -12%, which assumes that the restrictions imposed during lockdown will be gradually phased out in accordance with the government plan. For the second half of the year, a contraction of 11% year-on-year is estimated. In 2021, GDP growth is estimated to be around 8% (in the range of 6.5% to 10.5%). The fiscal deficit will increase to about 9.4% by the end of 2020, as a result of the fiscal effort implemented to alleviate the negative impacts of COVID-19 on households and businesses. These efforts are part of a wider program, equivalent to 16% of GDP according to official sources. Moreover, the central bank has cut the benchmark interest rate by 100 basis points between March and April, bringing it to 0.25%, a historical low. BBVA Research estimates that this rate will remain at this level for some time and that the programs implemented so far to create liquidity in the financial system and support payment chains through the "Reactiva Perú" program will continue.
The banking system is showing high year-on-year growth rates for lending and deposits (up 12.1% and up 13.3% respectively, in April 2020), with profitability levels affected by the lockdown (ROE: 15.7%) but with contained NPLs (NPL ratio: 2.6%).
INTEREST RATES (PERCENTAGE)
|Oﬃcial ECB rate||0.00||0.00||0.00||0.00||0.00||0.00|
|Euribor 3 months (1)||(0.38)||(0.42)||(0.39)||(0.42)||(0.33)||(0.31)|
|Euribor 1 year (1)||(0.15)||(0.27)||(0.26)||(0.34)||(0.19)||(0.11)|
|USA Federal rates||0.25||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)||78,8283||(38.1)||(14.6)||-||-|
- (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.