Regional Economic Outlook for Europe, Fall 2020

Europe, October 21, 2020

Source details

European real GDP is projected to contract by 7 percent in 2020.
European real GDP is projected to rebound by 4.7 percent in 2021.
The 2020 contraction is characterized as the biggest decline since World War II.
The recovery path is described as exceptionally uncertain; the ongoing resurgence of infections across Europe is identified as perhaps the greatest downside risk.

By mid-October 2020:
- more than 240,000 people have lost their lives in Europe.
- nearly 7 million people are estimated to have been infected with the virus.
Early spring lockdowns, voluntary social distancing, supply chain disruptions, and lower demand led to a record collapse in economic activity.
Real GDP fell by about 40 percent in the second quarter of 2020 (annualized quarter-over-quarter), with deeper contraction in advanced Europe relative to emerging Europe.

Governments across Europe deployed large fiscal packages to support households and firms.
Job retention programs are estimated to have preserved at least 54 million jobs.
Central banks implemented substantial monetary easing through both conventional and unconventional means to support credit flow and prevent financial market disruptions.
Macroprudential measures were eased to cushion the impact on banks and borrowers.
The European Union relaxed existing rules to accommodate increasing fiscal deficits and support to households and firms, and mobilized supranational resources to finance new anti-pandemic facilities and complement national fiscal policies.
The strong and multifaceted policy response is credited with avoiding more devastating outcomes.

Reopening measures led to a recovery in mobility but were associated with an uptick in infections—an uncomfortable trade-off similar to that documented in studies of lockdowns.
Novel findings on reopening:
- The increase in COVID-19 infections after reopening appears less severe in fatality rates.
- A given reopening step is associated with a worse reinfection outcome in countries that started reopening earlier on the infection curve or that opened all sectors at a fast pace in a relatively short time.

The crisis poses unprecedented shocks to European firms; the policy response has been unprecedented as well.
Using detailed balance sheet and income statement data for millions of European companies, the analysis finds:
- Job-retention programs, debt moratoria, grants, and loan guarantees could be effective in addressing corporate liquidity needs, especially in advanced European economies.
- The ability of announced policy measures to curb the increase in solvency risks appears more limited, especially for small and medium enterprises (SMEs), amid a projected rise in corporate indebtedness.
Policy implication: Careful calibration will be needed to better support companies that are deemed viable in the longer term and to facilitate the orderly exit of firms that are unlikely to succeed in the post-pandemic economy.

As long as the recovery is not entrenched and prospects for a vaccine continue to improve, there is a case for continuing policies that subsidize jobs to avoid a wave of bankruptcies and widespread social hardship.
Over time, support should shift increasingly to people and public goods to:
- foster structural transformation,
- enable reallocation of resources away from contact-intensive activities,
- address long-lasting challenges such as low productivity growth, transition to a low-carbon economy, and increasing inequality.

Regional Economic Outlook for Europe, October 2020