In the context of the COVID-19 crisis, we estimate that turnovers of Eurozone companies could fall between -15% to -25% y/y at the peak of the crisis end of March. Operating margins could be indented by 1.0pp to 1.5pp.
Taking into account the domestic demand shock and the contraction in international trade flows caused by the spread of Covid-19, we expect Eurozone GDP to contract by -1.8% in 2020 should the full lockdowns last for one month, or by -4.4% should they last two months. Hence, turnovers in the manufacturing sector could fall by as much as -15% y/y and -25% y/y in Q2. Over the year, we expect turnovers in the manufacturing sector to fall by -12% to -18%. Advanced indicators for March suggest that Eurozone companies face upside pressures on their input prices due to supply shortages and downside pressures on their selling prices due to the shock on demand. Lower for longer oil prices and government policies provide some support.
We estimate that, before the Coronavirus outbreak, 13,000 SMEs and MidCaps in the Eurozone (7% of total) were already at-risk. This cash flow crisis could now push them to default. Our past research has identified three leading indicators that can help detect corporate distress four years before a bankruptcy: profitability, capitalization and interest coverage. We apply these criteria to over 200,000 SMEs and MidCaps in Germany, France, Italy, Spain, Belgium and the Netherlands. In France, we find 10% of total SMEs and MidCaps are at risk, in Germany close to 9%, in Italy 5%, in Spain 6%, in Belgium 8% and in the Netherlands around 3% (see Figure 1).
The sectors most at risk are construction, agrifood and services. In France and the Netherlands, the services sector has the highest number of firms at risk. In Germany, Italy and Belgium, it is construction (see Figure 2). The concentration in the top five sectors is highest in France (67%) and the Netherlands (67%), followed by Belgium (64%), Spain (63%), Germany (57%) and Italy (56%).
All in all, we expect insolvencies to surge by +16% in Western Europe in 2020. Government interventions to support corporates (tax deferrals, state loans and guarantees, etc.) should help limit the overall number of bankruptcies. Yet, we expect a significant increase in insolvencies, particularly in Italy (+18%), Spain (+17%) and the Netherlands (+21%). Germany (+7%), France (+8%) and Belgium (+8%) would also post a larger rise in insolvencies than anticipated prior to the pandemic (Figure 3).
Figure 1 - Share of SME & MidCaps at risk, % of total