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Bracing For Europe’s Reversal

11 March 2020 by jbchevrel

The COVID19 outbreak is escalating across Europe. Governments are implementing restrictions to limit contagion, which means large parts of the economy are facing disruption. Some (Italy) imposed lock-down. A euro-zone recession looks like it is priced in here. The consensus sees € GDP falling -0.4% QOQ in Q1 and -1.0% QOQ in Q2. The consensus is still for a recovery from the second half of the year. What is not yet consensual however is what happens in H2 (v-shaped rebound or lasting GDP negative impact from H1 despite stimulus measures). This will be what tips us into negative 2020 GDP or keep us positive close to 0%. In terms of timing for the remainder of the year, some experts argue that the seasonality seen for SARS COV1 (start in November 2003 – peak in April 2003 – eased until 2004 and no new case seen since then) may well repeat itself here. Warmer temperatures in the northern hemisphere could ease the spread of the virus in Europe (and the US). In terms of geographical exposure inside the euro-zone, with the information we have now, it is fair to expect an Italian relative out-performance vs France Spain in case the drastic measures taken there bear fruits in the next 2 months. But in the short term, under-performance can continue. There has been some reports suggesting that the Italian regions of Lombardy and Veneto could consider a full lock-down, meaning that firms would be closed with no public transport at all. So, the situation may well become even more disruptive than it is now, in the next month. Similar measures will likely be seen in the rest of continental (especially France, Spain and Germany). In credit, we may see a point of no-return where widespread insolvencies may lock the GDP loss seen in H1 and make the case for no V-shaped recovery in H2-20 and 2021. On the positive side, we might see containment-triggered improvement (but what next?), or a bigger than expected fiscal response from low-debt countries in the €area, which would come as a much stronger signal than high-debt countries (Italy France). Tomorrow we get the ECB, some insights re it in yesterday’s post.