Update: 6 August 2020
Our view on economic growth:
Global economic growth suffered in the second quarter from the coronavirus (Covid-19) pandemic shock, leading to an unprecedented fall in quarterly GDP growth in the euro area and the US. Belgium followed the general euro area trend, whereas Ireland outperformed it, relatively speaking. Central and Eastern European countries were severely hit, too. During the second quarter, however, most advanced economies reopened their economies after intensive lockdown periods, initiating a strong recovery. This rebound became visible in all major economies, with China leading the way and returning to positive growth levels in the second quarter. Sentiment indicators and other data point to a similarly strong recovery in the euro area and the US. Nevertheless, caution is warranted, as the path to recovery could turn out to be a long and bumpy one, and will be heavily reliant on how the Covid-19 situation pans out. New virus outbreaks will undoubtedly slow down the recovery. The other main risk factors include the resurgence of the US-China trade and economic conflict and ongoing Brexit negotiations. Our base-case scenario assumes a steady but gradual path to recovery in both Europe and the US. We forecast for the European and US economy a strong recovery in the third and fourth quarter of 2020 and a continued recovery in 2021. However, risks are tilted to the downside. New outbreaks of Covid-19 followed by partial or full lockdowns may temporarily disrupt the course of recovery. We expect real GDP levels in the euro area to recover to their pre-coronavirus levels by the end of 2023 at the earliest.
Despite the expected recovery, the economic damage caused by the pandemic will be substantial. However, some negative effects have been postponed thanks to the temporary unemployment schemes and temporary moratoria on loans that mitigated the initial impact of the Covid-19 crisis. We expect European unemployment rates to go up in the second half of 2020 and in 2021. Moreover, we expect bankruptcies among European firms to increase, but the effect will be spread over a number of years. Hence non-performing loan ratios will gradually climb.
Our view on interest rates and foreign exchange rates:
The recovery is strongly supported by monetary and fiscal stimuli. We expect the ECB – and the Czech and Hungarian National Banks – to keep their policy rates unchanged in the years to come. Additional monetary stimulus measures by the ECB are likely, in the form of additional quantitative easing, in particular by extending the Pandemic Emergency Purchasing Programme. These market interventions will also guarantee low longer-term interest rates and compressed intra-EMU spreads in the coming years, despite country-specific risks (particularly in Southern Europe) and a structural upswing in public deficits and public debt ratios across Europe. Moreover, the ECB will continue to support European financial institutions through the TLTROs and the tiered deposit rate instrument. In recent months, fiscal stimuli have been extended substantially, both at EU level and by the EU member states. The ‘Next Generation EU’ instrument, launched by the European Commission and approved by the European Council, creates a tool for financial solidarity within the EU and has clearly succeeded in calming the financial markets. Moreover, the number and span of fiscal stimulus initiatives launched by national EU governments continue to increase. Combined monetary and fiscal stimulus will underpin the recovery in Europe, similar to the policy initiatives launched in the US.
The recent recovery of the euro against the US dollar should be seen as market optimism towards the economic recovery in Europe and the policy initiatives to support this trend. We expect the euro to continue its gradual appreciation against the dollar, although the rate at which it appreciates may slow down. Central European currencies have also recovered from their Covid-19 crisis dips. In particular, we expect the Czech koruna and Hungarian forint to remain relatively stable around their current levels in the near future. Bulgaria’s accession to the ERM-II is a welcome and expected step towards euro area membership, though that is not expected anytime in the next three years.
At present, a number of items are considered to constitute the main challenges for the financial sector. These stem primarily from the impact of the coronavirus crisis on the global economy and, in particular, the financial sector (including credit, market and liquidity risks and the impact of persisting low interest rates on our results). These risks come on top of risks relating to macroeconomic and political developments, such as Brexit and trade conflicts, all of which affect global and European economies, including KBC’s home markets. Regulatory and compliance risks (including anti-money laundering regulations and GDPR) remain a dominant theme for the sector, as does enhanced consumer protection. Digitalisation (with technology as a catalyst) presents both opportunities and threats to the business model of traditional financial institutions, while climate-related risks are becoming increasingly prevalent. Finally, cyber risk has become one of the main threats during the past few years, not just for the financial sector, but for the economy as a whole.
For more detailed analyses and data, please refer to KBC Economics.
Disclaimer: the expectations, forecasts and statements regarding future are based on assumptions and assessments made when drawing up this text. By their nature, forward-looking statements involve uncertainty. Various factors could cause actual results and developments to differ from the initial statements. Moreover, KBC does not undertake any obligation to update the text in line with new developments.