The Global economy is being severely affected by the COVID-19 pandemic. Supply, demand and financial factors caused an unprecedented fall in GDP in the first half of 2020. Supported by strong fiscal and monetary policy measures, as well as by greater control over the spread of the virus, global growth rebounded in the third quarter and is expected to continue this trend in the fourth quarter, although at a slower rate since the number of infections remains very high and it is even rising in some areas of the world. With respect to the coming year, activity recovery is expected to gain traction. The expected approval and distribution of effective COVID-19 vaccines and treatments will likely allow for a progressive relaxation of social distancing measures over the coming year, starting in the main world economies, followed by the rest.

Following the massive fiscal and monetary stimuli to support economic activity and reduce financial tensions, government debt has increased across the board, and interest rates have been cut and are now at historically low levels. Additional countercyclical measures may be required. Similarly, no significant reduction in current stimuli is expected, at least until the recovery takes hold.

Tensions in the financial markets have moderated rapidly since the end of March, following the decisive actions taken by the main central banks and the significant fiscal packages announced in many countries. In recent months, markets have shown relative stability and, at certain times, risk-taking movements. However, caution remains in the financial markets, with safe-haven assets in great demand, especially since the end of the summer. Financial volatility is expected to remain relatively high until the end of the year, mainly due to the still negative evolution of the pandemic and the United States presidential election. Besides, progress regarding coronavirus vaccines and treatments should pave the way for a gradual decline in financial volatility throughout 2021.

BBVA Research estimates that global GDP will contract by around 2.9% in 2020 and expand by around 5.4% in 2021. The recovery in terms of activity will be incomplete and heterogeneous. Also, epidemiological, financial and geopolitical factors are keeping an exceptionally high uncertainty.

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, the services provided have played an essential role, basically for two reasons: firstly, banks have ensured the proper functioning of collections and payments for households and companies, thereby contributing to the maintenance of economic activity; and secondly, the granting of new lending or the renewal of existing lending has reduced the impact of the economic slowdown on household and business income. The support provided by the banks over the months of lockdown and the public guarantees have been essential in avoiding liquidity and solvency problems for companies, meaning that banking has become its main source of funding.

In terms of profitability, European and Spanish banking remain far from the levels seen before the crisis, mainly driven by the recognition of high provisions for impairment on financial assets in the first two quarters of 2020 by many banks as a result of the worsening of the macroeconomic environment following the outbreak of the pandemic. In addition, there has been accumulation of capital since the previous crisis and the interest rate environment has been very low for several years. Nevertheless, banks are facing this situation from a healthy position with constantly increasing solvency since the 2008 crisis, with reinforced capital and liquidity buffers and, therefore, with a greater lending capacity.

Europe

In Europe, fiscal stimulus packages continue to be implemented by all the European authorities, both the European Union (hereinafter EU) and the Member states. In particular, the approval of the European Recovery Fund (Next Generation EU; hereinafter NGEU) is an important step for supporting the recovery after the COVID-19 crisis, as it complements other previous stimuli launched by the local governments and the EU itself. Its approval by the European Parliament is still pending. Each country should submit a national plan in order to be assessed between October 30, 2020 and April 2021, and afterwards approved by the European Council. NGEU funds are not expected to be disbursed significantly until the second half of 2021. The fiscal stimulus of €750,000m (5.4% of EU GDP) could raise GDP by more than 4% in 2024 in some countries, according to estimates from the European Commission. The European Central Bank (hereinafter ECB), following its announcement made in June, on an extension of the Pandemic Emergency Purchase Programme (PEPP) by €600,000m to a total of €1,350,000m and the extension of the buying horizon until at least the end of June 2021, has made no further changes to its monetary policy, although this program could be expanded in the coming months. In terms of growth, COVID-19 is causing a major impact on GDP growth in the EU in 2020. The lockdown measures during the second quarter led to a sharp reduction in supply in a wide range of sectors, while there was a simultaneous fall in demand in the social consumption sectors (especially travel and tourism). The recovery has exceeded expectations in the third quarter of the year, but the second wave of COVID-19 is expected to limit growth in the fourth quarter. Overall, the contraction of GDP in 2020 is expected to stand at -8%. BBVA Research is assuming a growth recovery in 2021 (up 5.2% for the year), on the assumption of a widespread distribution of a vaccine around the second quarter of 2021 and also due to the NGEU, which will only have a significant impact on growth from the second half of 2021 and 2022.

Spain

In terms of growth, according to BBVA Research estimates, Spanish GDP could contract by 11.5% in 2020 and grow by 6% in 2021. The third quarter has been somewhat better than expected in terms of activity and employment, but a slowdown is expected by the end of the year due to the second wave of the pandemic and its impact on activity (already seen in several leading indicators, such as spending on credit cards, especially in the provinces most affected by infections). The risks to economic activity remain focused on the epidemic, the measures needed to contain its spread and their economic impact. Another important factor in the forecasts is the potential effect of the European Recovery Fund. Its contribution to activity is most likely to increase over the next year, particularly in the second half of 2021 and, above all, in 2022. The impact of the NGEU will depend crucially on the speed with which the projects can be launched, on the correct management of the funds and also on the correct identification of the projects that have the greatest impact on employment, activity and the transformation of the Spanish economy.

In regards the banking system, according to Bank of Spain data, the total volume of lending to the private sector recovered slightly in August 2020 (up 1.9% year-on-year) as a result of the growth of new business lending transactions since April, within the framework of the public guarantee programs launched by the government to deal with COVID-19. For its part, asset quality indicators have continued to improve (the NPL ratio was 4.75% in August 2020). Profitability entered negative ground in the first half of 2020 due to the increase in provisions resulting from the coronavirus crisis and, above all, the extraordinary negative results in the second quarter. In addition, the low interest rate environment has kept profitability under pressure. Spanish institutions maintain comfortable levels of capital adequacy and liquidity.

The United States

The consequences of coronavirus have resulted in a number of strong supply and demand shocks in the economy of the United States. As a result, the country's GDP fell 9.5% in the second quarter of the year compared to the previous quarter. However, despite the complex macroeconomic environment and the adverse epidemiological framework, activity indicators suggest that the economy has been recovering strongly in recent months. The unemployment rate, in particular, fell to 7.9% in September, after reaching 14.7% in April. The increase in activity dynamism in recent months is due, among other factors, to the significant monetary and economic stimuli announced since the onset of the health crisis. Specifically, among other measures, the Federal Reserve (Fed) has reduced interest rates to zero, launched a program of massive purchases of financial assets, created a number of credit facilities and revised its monetary policy strategy, suggesting greater tolerance for inflation in the future. Similarly, counter-cyclical fiscal measures, which already amount to about 18% of GDP, could be expanded in the coming months, depending, among other factors, on the outcome of the presidential elections on November 3. GDP recovery, was faster than expected, supported by the successful fiscal and monetary stimuli measures implemented, has allowed BBVA Research forecasts to be revised up to -4.6% (from -5.1% previously estimated) in 2020, and up to +3.8% in 2021 (from +3.5%).

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 coronavirus, with year-on-year lending and deposit growth rates of 6.8% and 21.7% respectively for the system. NPLs remain under control, with the NPL ratio standing at 1.51% in the second quarter of 2020.

Mexico

BBVA Research estimates that the Mexican economy will contract by 9.3% in 2020 and grow by 3.7% in 2021. In recent months, the gradual increase in domestic mobility, together with the reactivation of supply-side production, has led to an economic upturn in the third quarter. In the face of the unprecedented fall in economic activity as a result of the pandemic, fiscal support has been very modest and monetary policy has been only slightly accommodative. With this minimal support, coupled with lack of coherence in the decisions taken by the Government, as well as the de facto cancellation of the energy reform, investment has deteriorated considerably and continues to show no clear sign of recovery. BBVA Research estimates that inflation will remain relatively low, although at a slower pace than expected a few months ago. In addition to this, BBVA Research considers that the monetary policy rate still has room to even fall further, although at a slower pace.

The banking system continues to grow year-on-year. According to CNBV data as of July 2020, lending and deposits grew by 4.5% and 13.1% year-on-year respectively, with increases in all portfolios except consumer finance. The NPL ratio remained under control (2.09% in May 2020) and capital indicators were comfortable.

Turkey

For Turkey, BBVA Research expects GDP to remain stable in 2020 and increase by 5.5% in 2021. In particular, the 0% forecast for this year remains, as GDP grew more than expected in the third quarter and consumption continues to rise. The central bank (CBRT), cut the average financing rate by 350 basis points throughout the first half of 2020 due to the easing of the monetary policies in the most advanced economies and the increase in downside risks for economic activity. However, pressures on the Turkish lira and upward risks in the inflation outlook have caused the CBRT to have been tightening its monetary policy (currently by 12.1%) through different channels, resulting in an implied hike rate of nearly 480 basis points compared to the end of June. BBVA Research estimates CBRT will continue to increase the effective funding rate during the rest of the year, with certain relaxation in 2021. With regard to the lira exchange rate, it is expected to stabilize in the coming year. Inflation estimates were adjusted to 11.5% for 2020.

With June 2020 data, the total volume of credit in the banking system increased by 27.9% year-on-year. These growth rates include the effect of inflation. The NPL ratio stood at 4.73% at the close of June 2020.

Argentina

BBVA Research estimates that GDP will contract by 13% in 2020 with a partial recovery in 2021 to stand at 5.5%. In response to the COVID-19 epidemic, the country has had one of the earliest and longest lockdowns in the continent. The extensions of the quarantine have been accompanied by fiscal support from the government, currently focused on some sectors and regions. The expected recovery will be influenced by these extensions, as well as by the exchange-rate restrictions adopted to halt the fall in reserves. Significant fiscal adjustment is unlikely so the monetization of the deficit will continue, which in turn will place upward pressure on inflation and the exchange rate. The government reached a renegotiation agreement with external creditors and BBVA Research considers that the renegotiation underway with the International Monetary Fund (IMF) is an opportunity to adopt a coherent macroeconomic plan. Given the current situation linked to the pandemic, the balance of economic risks is downward.

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 July 2020, the profitability indicators have deteriorated significantly (ROE: 18.8% and ROA: 2.7%) due to the COVID-19 effect, after reaching record highs at the end of 2019. For its part, the NPL ratio fell slightly to 5.11% in June 2020.

Colombia

BBVA Research estimates a contraction of 7.5% in 2020 and a partial recovery of 5.5% in 2021, and that the level of activity seen before the COVID-19 pandemic will not be reached until 2022. The better prospects for private consumption are offset by a less optimistic expected outlook for investment. On the other hand, net foreign demand will contribute positively to growth in both 2020 and 2021, mainly as a result of the decline in imports. BBVA Research estimates that inflation will remain below the 3% target (1.7% in 2020, 2.8% in 2021), paving the way for the monetary policy benchmark interest rate to remain at the current 1.75%. The IMF approved a USD 6,200m increase in the Flexible Credit Line, which the country plans to use partially as budget support. The government estimates a fiscal deficit of 8.2% in 2020 and that this will fall to 5.1% in 2021. In these years the fiscal rule will be suspended. BBVA Research does not rule out Colombia losing investment grade for its government debt given the concerns on the fiscal and external front. The negative effects of the fall in rating would however be limited given the broad global liquidity.

Total lending in the banking system grew by 8.6% year-on-year in July 2020, due to the growth in the commercial portfolio driven by government-approved guarantee programs during the pandemic. The system's NPL ratio as of May 2020 was 4.08%. Total deposits increased by 17.7% year-on-year in the same period.

Peru

BBVA Research estimates that the gradual normalization of production activities that began in May has implied upward surprises to the GDP growth forecasts made one quarter ago. The estimated fall in 2020 has therefore been revised upward and would stand at 13%. It is also estimated that this will be partially offset in 2021 by the estimated growth of 10%. This recovery could be affected by political uncertainty surrounding the April 2021 general election. Inflation will remain below the Central Bank's point target of 2% in 2020–2021, allowing monetary policy interest rates to remain at their low record of 0.25% over a long period. BBVA Research estimates that the fiscal deficit will increase in 2020 to almost 10% of GDP. As a result, gross government debt will rise from 27% of GDP in 2019 to 34% in 2020. Given the transitory nature of most of the fiscal support provided this year, the deficit should fall in 2021 to around 5% of GDP and by even more so in the following years. However, gross government debt will continue to rise.

The banking system showed high year-on-year growth rates for lending and deposits (up 17.7% and 25.0%, respectively, in July 2020), due to the strong momentum of the Plan Reactiva in Peru; the system showed levels of profitability affected by the lockdown (ROE: 9.7% as of August 2020) but with contained NPL (NPL ratio: 2.55% as of August 2020) due to the payment deferrals applied.

INTEREST RATES (PERCENTAGE)

Foreign exchange behavior is being determined in 2020 by the economic effects associated with the economic crisis caused by coronavirus and by more idiosyncratic aspects of the geographical areas. The Turkish lira (down 26.5% between January and September 2020 and down 15.6% in the third quarter) is an example of the latter, and is being particularly affected by local factors. The Mexican peso suffered a sharp depreciation after the eruption of coronavirus in the first quarter of the year but has subsequently recovered ground, especially against the U.S. dollar, and had a cumulative depreciation of 19.0% against the euro at the end of September. The U.S. dollar is showing a cumulative depreciation of 4.0% against the euro, which was concentrated in the third quarter after the positive reaction to the euro after political agreement was reached for the European Recovery Fund. As for other currencies, at the end of September, they performed as follows: Argentine peso (down 24.5%), Colombian peso (down 18.9%), Peruvian sol (down 11.7%) and Chilean peso (down 8.4%).

For more information about the BBVA Group´s foreign exchange risk management policy, see the “Risk management” chapter of this report.

EXCHANGE RATES (EXPRESSED IN CURRENCY/EURO)