Coronavirus can lead to sharp
recession

Coronavirus can lead to sharpest recession in years

Covid-19 rules our lives worldwide. The current Coronavirus pandemic has forced authorities worldwide to press the pause button, for at least three months. An unprecedented situation. In these extraordinary times, policymakers have taken extraordinary measures. They do everything they can to flatten not only contagion curve of Covid-19 but also the recession curve.

Worldwide recession

In their central scenario Euler Hermes’ economists predict a sharp global recession in the first half of 2020, followed by a U-shaped recovery. This is the case in the vast majority of developed and emerging economies.

Economic contraction

Globally a 15% decrease of GDP growth worldwide is predicted for de first half of 2020. In Eurozone countries as well, economic growth will be negative in 2020. Euler Hermes expects a decrease of 1.8%, compared to an increase of 1.2% in 2019. For Belgium, they predict a negative GDP growth of -1.2% in 2020. In particular, the second quarter of the year will be impacted by a significant negative growth of -2.7%. These forecasts assume a lockdown of 1 month. Should the confinement measures last for additional four weeks, the negative DGP growth could even reach -3.5% in Belgium in 2020.

Volatile actions

For capital markets, it will get worse before it gets better. Markets are not fully pricing the negative news flow coming with lockdowns. It is expected that volatility will bring down equity markets on a short time by an additional 10 to 20%.

More insolvencies

For companies, Euler Hermes’ experts expect insolvencies to increase by 13% worldwide in 2020. For Belgium, an increase of 8% to 10% is expected over the record level of insolvencies in 2019. Clearly more than the 2% that was presupposed before this crisis. Following sectors are particularly at risk in Belgium: construction, services, agrifood, retail and transport.

Governments jump in

Not less than 65 million employees across the EU are at risk of needing assistance of the government according to Euler Hermes economists. Governments across the Eurozone have taken measures to limit the damage and support active population as good as possible. The cost of which could reach EUR 120 billion or 0,9% of GDP. Due to this very sharp, yet temporary crisis, jobs will get lost. The unemployment rate in the UE is expected to rise to just above 8%, only 1% higher than the current level. In particular, workers with temporary contracts and self-employed works will be affected.

Plan B?

Besides the scenario of a U-shaped recession, were it gets better after a deep crisis, Euler Hermes’ economists also worked out an alternative. They assume an L-shaped protracted economic and financial crisis due to a 12-18 months health crisis with possible reinfection. In this scenario, they predict a major recession in 2020 with a negative GDP growth and a decrease of economic growth of 6% in the Eurozone.

Will we draw lessons from this?

According to Euler Hermes, this Covid-19 crisis will change our view on things on many levels. Investments in the health system could be back in the spotlights after years of underinvestment. We will look at China’s soft power from a different perspective. They were the first victim, but were also the first to overcome the crisis. Today they show generosity to other countries by delivering mouth masks and expertise. Globalization gets another strong blow. Countries will fold back more on their own and introduce stricter controls. The way in which we face other exponential and collective challenges, such as climate change, will change. Urgency will prevail over resources. A succession of stock market crashes could have an impact on future investments and lead to a more defensive strategy. Today we shop, work and travel in a completely different way. This crisis can also make us save more for unforeseen circumstances.

Read the full study here.

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