Delayed but not derailed:  The Eurozone recovery after ‘lockdown light’

Q4 2020 GDP looks set to contract by around –4% q/q, bringing the full-year 2020 forecast to –7.6%. However, expect a timid recovery in 2021 (+4.1% vs +4.8% expected at end September) as strict rules on social interactions remain in place. Only in the second half of 2021 will the anticipated availability of an effective vaccine, to be rolled out before year-end, provide some much needed tailwind to the economic recovery by reducing economic uncertainty. Nevertheless, the risk of long-term scarring to the economy has risen in the face of more insolvencies, higher unemployment and increased pressure on the banking sector.

Desperately seeking an adequate policy response. For our baseline scenario to hold, policymakers will have to swiftly upgrade their crisis response, with a view on propping up private sector confidence, averting a ‘triple-dip’ recession and keeping a lid on permanent damage to the economy. This would require national governments to ramp up their contact tracing strategies, while extending emergency fiscal relief (short-work schemes and public credit guarantees). On the monetary policy side, the ECB will have to recalibrate its policy response at the upcoming December meeting by boosting its QE programs by EUR500bn for 2021 to keep a lid on refinancing costs for governments as well as the private sector and ensure sufficient liquidity provision.

What does this mean for corporates? A prompt and rightly sized policy response should avoid a large-scale corporate cash-flow crisis. The share of SMEs which have a negative EBITDA margin i.e. those that are the most at risk of a cash-flow crisis, is estimated at between 15-20% in the four biggest Eurozone economies. In addition, the share of zombie SMEs – SMEs which have high debt levels, low profitability and low equity ratios – stands between 8-10%. That is why  the double-dip confidence effects could prove more dangerous by discouraging companies to cover the cash-flow issue with additional debt in an environment where turnover growth in the hardest hit sectors is not expected to go back to pre-crisis levels before 2023. 

What does this mean for capital markets? Yield curve steepening, equity overvaluations providing little cushion against adverse outcomes and corporate (high-yield) bond worries. One could expect a modest steepening in sovereign yield curves, more so in the U.S. than in the EMU in line with the rapid increase in public deficit and debt ratios. Secondly, on the equity side, overvaluations have been boosted in the U.S. and Emerging Markets compared to Europe and provide little cusshion against adverse outcomes. In the U.S., they also represent a downside risk on the USD exchange rate. Lastly, our worries regarding the corporate bonds segments have increased, notably for the high-yield segment as it is not part of a central bank’s classic job description to lend to insolvent businesses.


Eric Barthalon
Allianz SE
Ana Boata
Allianz Trade