“What will be the shock under real conditions? Businesses are currently in a waiting phase”

The analysis

It is important to remember that before the crisis, we were in a world where we expected a slowdown in growth in almost all developed countries by 2020. The health shock amplified the slowdown and even led the majority of developed countries to the biggest recession since the Second World War. Unsurprisingly, the impact was much more violent in China, where the crisis began in the first quarter. It then affected the developed countries, particularly France, Spain and Italy. This led to a contraction in the first quarter, we will have the figures for the second quarter at the end of July and beginning of August, but they will reflect an extremely significant contraction in Europe.

The impact will be all the more significant in Europe, as this is the zone that has chosen to implement the most drastic containment measures and for a longer period of time. As a result, GDP will contract by more than 10% on a quarterly basis in Europe. If we look at the Banque de France’s forecasts, we are likely to be at -15% in France. The country that is doing best in the second quarter is China. Since they took the shock before anyone else, they were able to bounce back mechanically first. This can be explained by the immediate and massive investments in all aspects of infrastructure. Public investment was extremely significant in May and June. The idea of the authorities was to create a foundation of confidence, to be able to return to growth at a time when there was a drop in external demand, but also on a domestic level. Although consumption in China is improving compared to the first quarter, on a year-on-year basis all the data is negative.Consumption is taking a long time to recover. This is all the more true for all sensitive sectors such as tourism, but also shopping centres and recreational activities. Although this is not a surprise, it is clearly reflected in the figures for the month.

The Coronavirus crisis has affected 90 or 95% of the world’s countries. The United States was affected with a much more marked impact from mid April and over the month of May. Then restarted at the end of May until the end of June. In short, it is a global shock, which leads to a global recession in the first half of the year. 

The impact could have been worse, it was tempered by two factors:

• An extremely accommodative monetary policy. Between March and June, the G7 central banks injected $6 trillion.
• A generalised fiscal policy of support in terms of fiscal stimulus, at the global level resulting in nearly 8% of GDP injected. 

What is the outlook for the end of the year?

The only area that may see a “V-shaped” recovery, is China. They have a higher growth potential than  developed countries. Between 5.5% and 6% today, compared with 1.5% for developed countries. For an equivalent shock, it is normal for China to catch up more quickly. We can estimate that it will do so as early as the third quarter, as we are already close to pre-crisis levels. Developed countries have been hit harder and mobilized fewer resources than China has been able to do. China also managed the crisis in this field differently thanks to its experience.

Performance levels in Europe in the fourth quarter of 2019 will not return to pre-crisis levels until 2022, or even the second half of 2022. In the United States, performance levels should return to normal in the first part of 2022. In Europe, Italy will have to wait until 2023, and this is also a risk for Spain. Conversely, Germany could emerge from the crisis a little earlier. The country that has invested heavily, like China, is also the country with the highest margin in the eurozone.

These projections are conditional for various reasons:

• The dates for the deployment of the 750 billion euro recovery plan agreed by the EU are not yet known. We do know, however, that it will accelerate the rate at which growth can resume.
• The United States is in the midst of negotiations for a new fiscal stimulus that could arrive before Congress recesses in August.
• There is the continuing health risk. The epidemic remains active around the world.

Even in countries that managed to contain the first wave. There are also resurgences in Europe. So there is a risk that in September we will return to the continuity of the first wave. November, with less favourable climatic conditions, will be even more risky. The question of national measures would then arise. I do not think that we would go back to the kind of lockdown that we have experienced because it is really too costly.

There is the risk associated with the presidential elections in the United States, which are due to take place on November 3. There are two candidates who are at odds with each other on different issues. As far as China is concerned, Joe Biden will have a more diplomatic approach on the form even if he won’t be more sympathetic to the Middle Kingdom on the substance. If Donald Trump is re-elected in November, China will be one of his objectives but also Europe. Many things can change with regard to trade greements, in particular the one signed in January, which is not respected at all by the Chinese.

There will be a mechanical resumption of growth after a total halt. We can expect Europe to post growth figures in the third quarter that are the highest in the world, since it is the zone that was the most affected in the second quarter. What will be the shock in real conditions? Companies are currently in a wait-and-see phase, but the start of the new school year could see the announcement of investment cuts or even redundancies. This could put a second halt to growth. This would make it even more difficult to fully absorb the shock in the coming quarters. In the United States the country is still in the first wave. There are still some states that continue to apply restrictive measures. The rebound in growth will be weaker than what we will see in Europe.

Do you think that, in the long term, there could be a decorrelation between the GDP trajectory and hotel performance?

To return to a perfect normalization, I remain convinced that an effective vaccine will be needed that is available to everyone. As long as this is not the case, many sectors will be lagging behind, particularly hotels, restaurants and transport. When the summer season comes to an end, there will inevitably be redundancies and companies will have to restructure. These companies will cut their budgets, and in particular, perhaps, all business travel in the short term. To what extent will technology replace physical events? This business travel portion is likely to be a very lagging indicator. I’m not surprised that large companies in the sector don’t anticipate a return before 2023 compared to the second part of 2022 for the rest of the economy. The real difficulty remains the uncertainty on the health front. In China, where the situation is supposed to be normalized, the resumption of transit is very slow. The holding of major events is also impacted. This uncertainty for companies means cutting CAPEX, cutting costs and freezing hiring.

There is an opportunity to reinvent ourselves locally and nationally.

More insights by Christophe Barraud on his Blog.