Esade forecasts asymmetric economic recovery in different countries, sectors and population groups

08.07.2020

Recovery measures will have a huge impact on countries’ public budgets, including a sharp increase in their deficits and higher public borrowing, in both developed and emerging economies

Wednesday, 8 July 2020. Global economic recovery will vary according to the country, sector and population group, and the ensuing social inequality may cause political friction. This is one of the findings of the Esade Economic and Financial Report produced in conjunction with Banco Sabadell and edited by José Ignacio Conde-Ruiz, an Esade guest professor, FEDEA deputy director and co-author, together with the Esade professor Josep M. Comajuncosa, of the scenario analysis and forecast. The report warns that most of the recovery measures will hugely affect countries’ public budgets, with a sharp increase in their deficits and, therefore, higher public borrowing, in both developed and emerging economies.

At the global level, Esade forecasts that the second half of 2020 will be slightly better than the first half when the lockdown caused a supply shock due to the standstill in production and services, and also a demand shock due to the slump in consumption and business investment which, together with widespread uncertainty, triggered an economic recession worse than the financial crisis of 2009.

The global economy will gradually recover as lockdowns are eased and the economy swings back into action, although some sectors will take a while to return to their pre-crisis level because they involve greater social contact. The extent of a country’s recovery will depend on how well it deals with the solvency problems of its SMEs in these sectors and minimises the numbers of bankruptcies and redundancies. It will also depend on the monetary policies implemented by each central bank. These policies must be very expansive in order to accommodate the indispensible expansionary fiscal policies.

The Eurozone is confident about its financial health and the Economic Recovery Fund

The European Central Bank (ECB) forecasts a fall of 8.7% in the Eurozone in 2020, almost twice that of 2009 (4.5%), and aggregate growth of 5% in 2021%. Esade does, however, point out that recovery will be uneven: Germany will end 2021 with 0.5%, higher than the pre-pandemic production level, whilst other countries such as Spain, Italy and even France, will tend to be lower.

One strong point for Eurozone recovery will be its healthy banking industry which is far more robust in this crisis than during the great recession. ECB monetary policy has kept credit flowing to companies (including SMEs) and managed to keep interest rates on public borrowing low and similar in different Eurozone countries. One key factor for robust recovery is the future European Economic Recovery Fund. The terms in which it will be approved this summer by the European Council will signal the political desire to move towards closer fiscal unity in the Eurozone.

In principle, the European Economic Recovery Fund intends to earmark €750,000 million for investment mainly in healthcare, education and measures to improve the long-term growth and productivity of the Eurozone economy to make it more digital and environmentally sustainable. The cost will be defrayed by bonds issued between 2021 and 2024. These bonds will be charged to the EU budget and new forms of taxation related to the digital world and the environment may be introduced. This would be a very important step towards the fiscal integration necessary to convert the Eurozone into an optimum monetary area, as the authors of the Esade Economic and Financial Report point out.