Economic Outlook: EU sees sharpest GDP decline as 7.4% unemployment rate recorded – EM capital flows ‘bad news but not catastrophic’

1st May 2020 (Last Updated May 1st, 2020 13:07)

1 May

Seasonally adjusted GDP decreased by 3.8% in the euro area and by 3.5% in the EU during the first quarter of 2020, compared with the previous quarter, according to a preliminary flash estimate published by Eurostat, the statistical office of the European Union. These were the sharpest declines observed since 1995.

Eurostat also estimates that 14.1m men and women in the EU, of whom 12.1m were in the euro area, were unemployed in March 2020.

Compared with February 2020, the number of persons unemployed increased by 241,000 in the EU and by 197,000 in the euro area.

In March 2020, the euro area seasonally-adjusted unemployment rate was 7.4%, up from 7.3% in February 2020. The EU unemployment rate was 6.6% in March 2020, up from 6.5% in February 2020.

 

Emerging markets (EM) are suffering two sudden stops – in economic activity and in capital flows – but only one of them is ‘unprecedented’, writes David Lubin, Head of Emerging Markets Economics at Citi.

“As far as capital flows are concerned, the news is bad but not catastrophic, and risk appetite towards EM seems higher today than it did at the same point of the Global Financial Crisis.

“The collapse in emerging market inflation will give central banks more scope for easing. We think emerging markets might see rate cuts in the coming months that, by normal standards, might seem shockingly low.

“A key question for emerging markets is whether investors, both domestic and foreign, have any confidence that these countries can grow out of their debt, and on this issue we are pessimistic. Low interest rates in developed markets might help push capital towards emerging markets, but that’s not a reason to be confident about the future of the asset class given the uncertainties that now afflict the global economy.”

 

HSBC’s head of equity strategy for Asia-Pacific, Herald van der Linde, has written in a blog that many countries are trying to look at suppliers outside of China in light of the Covid-19 pandemic, with some governments encouraging ‘re-shoring’ – bringing factories home.

“But highly complex production networks established over decades cannot be easily re-shored or relocated. Where products are highly specialised or where mainland China is dominant, as with 5G telephony or cosmetics, it is nearly impossible – or it will take considerable time – to move those supply chains.”

In addition, Van der Linde notes there are companies using the current situation to increase operations in China, with the Chinese government offering incentives to attract foreign investment.

Van der Linde also predicts that tensions between Beijing and Washington could accelerate plans for China to become self-sufficient in energy, power and technology.