Category Archives: Euro area

29/6/20: Eurocoin Growth Indicator June 2020

Using the latest Eurocoin leading growth indicator for the Euro area, we can position the current COVID19 pandemic-related recession in historical context.

Currently, we have two data points to deal with:

  1. Q1 2020 GDP change reported by Eurostat (first estimate) came in at -3.6 percent with HICP (12-mo average) declining from 1.2 percent in January-February to 1.1 percent in March.
  2. Q2 2020 Eurocoin has fallen from 0.13 in March 2020 to -0.37 in June 2020 and June reading is worse than -0.32 recorded in May. This suggests continued deterioration in GDP growth conditions, with an estimate of -2.1 percent decline in GDP over 2Q 2020. HICP confirms these: HiCP dropped from 1.1 percent in March 2020 to 0.9 percent in May. 
Here are the charts:

We are far, far away from the growth-inflation 'sweet spot':

26/6/20: Longer-Term Impact of COVID19 on Growth

IMF published updated forecasts this week, and here the summary:

World Economic Outlook, June 2020, Growth Projections table

IMF has stopped doing 5 year forecasts this April, due to uncertainty induced by the COVID19 pandemic. 

Looking at the longer run effects of the pandemic, based on October 2019 (pre-Covid19 trends), and earlier growth trend before the Global Financial Crisis (GFC) puts COVID19 pandemic into historical perspective:

The differences between the above trend lines are telling. 

Globally, GFC resulted in a permanent loss of real income that amounts to a cumulative decline of ca 17 percent over 17 years (2008-2024). COVID19 is forecast to result in additional permanent loss of 3.2 percent within 5 years 2020-2024.

Eurozone has been hit even harder. GFC resulted in a permanent loss of real income to the tune of 12.8 percent while COVID19 is currently set to yield a permanent additional loss of income to the tune of 7.1 percent over less than 1/3rd of the post-GFC trend line duration. 

The numbers above are rather 'indicative', in so far as any and all forecasts past 2020 are perilous at the very best. But you get the picture: we are witnessing two consecutive events that result in permanent deviation of economic activity away from the prior trends. And both events are sharp. Even with a 'V-shaped' recovery, we are in trouble (because a V-shaped recovery taking us into mid-2020 means recovering end-of-2019 levels of economic activity, while losing 1.5-2 years of growth momentum (recall, economy was slowing down in H2 2019 on its own, without COVID19). 

As we say... [ok, well, may we do not say it often, but...] this picture is f*ugly... 

24/6/20: German Business Sentiment for June: Mixed Signs of the Ongoing Recovery

Germany's ifo Institute published June survey results for business confidence, reflecting the latest changes arising from the graduate, but fast, 'normalization' of economic activities. There are some improvements in forward expectations, set against virtually no improvement in current conditions:

The gap between pre-COVID19 and current conditions sentiment remains massive, with trough to current reading improvement of just 2.4 points, compared to the pre-crisis to trough fall of 20.2 points. Expectations (6 months forward) gains 11.9 points on the trough, with pre-crisis to trough decline of 21.5 points. This implies that forward expectations are now just over half-way into recovering pre-COVID19 levels, but current conditions assessment still shows dire state of the economy.

So far, current conditions dynamics do not suggest a V-shaped recovery, but there is some hope in terms of expectations. Manufacturing and construction sectors dominate negative outlook. Services sectors current assessment is matched by forward expectations, while trade sectors are showing more robust recovery across the board.

1/6/20: COVID19 and European Banking

McKinsey research note on European banks' potential losses due to COVID19 is quite on the money:

With more than 1/3rd of European executives expecting "a muted recovery that would lead to sharp drops in banks’ revenue, a squeeze on their capital, and a hit on return on equity", European banks can expect revenues to drop by 40 percent plus, and ROE drop 11 percentage points in 2021.

And the problems are strategic. COVID19 is actually accelerating changes in customers' demand for services. "McKinsey’s European customer survey shows how customer behavior and needs have changed over the past month: digital engagement levels have climbed up to 20 percent, the use of cash has halved, 30 to 40 percent of customers have expressed a greater need for advice, while 20 to 40 percent want products to help them through the crisis.4 Pension shortfalls are a particular challenge with those close to retirement facing a very immediate problem."

Alas, European banks, especially those operating in the 2008-2014 crises-hit economies, such as Ireland, Italy, Spain and Portugal, are utterly unprepared for these shifting trends. I wrote about these problems in a series of two article for The Currency here: and

27/5/20: Germany: Employment and Business Activity Show Gentle Uptick in May

Germany employment conditions improved slightly in May, based on ifo Institute survey:

The gains are in line with the Business Activity survey results:

However, both business expectations (major driver of improvement) and current conditions (remaining deeply under water and actually still deteriorating in May) are well below 2009 crisis reading: