18:20 | Mon | 22 February 2021
The COVID-19 pandemic is creating severe market crisis and economic hardship in the world. While the immediate policy measures and lockdowns dampened the impact of the pandemic’s first wave, a large second wave and new lockdowns have significantly affected the market and the economy. Today we’ll be looking into detail how Europe and China have fared during the pandemic.
The latest economy and market assessment of Europe dictates that main policy challenges concern allowing the continued recovery whilst simultaneously assuring the pandemic is contained. The following 4 factors have been identified to illustrate what has impacted the market or what crucial changes do European countries need to implement in order to at least partially recover from the crisis.
- The economy was predicted have a significant drop in 2020 before starting to recover in 2021. Despite the hopeful forecast of a rebound, Europe has suffered permanent losses from the pandemic. Contact -required sectors such as tourism and transport are expected to suffer the biggest losses in the near future, alongside shops and restaurant which had to close down completely.
- Immediate responses and quick policy changes have limited the impact of the pandemic. Daring financial policies by the ECB (European Central Bank) have eased the pressure on markets and have facilitated economic conditions, in order to allow financing of households and businesses. Countries such as Germany and France have introduced brand new short-term solutions to unemployment by creating programs with short work time which has allowed companies to cut working hours rather than fire employees. Other policies such as wage subsidies and debt payment suspensions have been implemented to reduce business costs.
- While the European zone is preparing for a long process of recovery, the economic policies should aim to target specific industries and sectors to ease the transition to a post-crisis world. Restaurant and shops will need the support in order to survive. As the lockdown restrictions are gradually lifted, more resources should be attributed to allow workers to find employment in growing companies and businesses. Increasing investments in the aggregate culture will help to lower the negative impact of the pandemic on this particular sector.
- European countries will also need to address pre-existing issues which were further exposed during the pandemic. Policies will need to be changed in order to assist countries in less-fortunate regions which usually depend on tourism and transport and will further suffer from the impact of the crisis.
In the last worldwide crisis, more than a decade ago, banks were a huge part of the problem. Today during the COVID-19 pandemic they could be a huge part of the solution, alongside capital markets. Banks across Europe reacted swiftly to the COVID-19 pandemic by increasing bank loans to companies supported by government issued lending schemes. Bank loans to companies without financial backing were close to 5 times higher than in the same period last year – over €300bn. Capital markets have also played a significant role in providing a substantial amount for the funding of 800 companies across Europe between March and June of 2020. Capital Markets serve as a “lifeline” for the economy in times of urgencies and crisis. Across Europe, capital markets funding in the space of 3 months resulted in 2% increase of GDP and represented almost a fifth of all external funding to companies. The unexpected pandemic led to serious economic repercussions which tested the coordination and resiliency of countries worldwide. Today we will look how countries across Europe reacted to the crisis.
- Government backed loans to support companies
- A three-month mortgage payment holiday for homeowners
- Funding grants of up to £25,000 for smaller businesses
- An extension of the business rate holiday announced in the budget - important for shops and local businesses
Unlimited liquidity assistance has been promised to German business which have been impacted by the pandemic. However, the situation in Germany is a bit more complex than a financial issue. One of the biggest talking points is how much economic burden will Germany carry compared to some of the other countries in Europe. The situation has been described as a politically sensitive topic, as other European leaders believe saving Europe’s leading economy should not in any way be prioritized over other countries.
Italy was second only to China in the number of positive cases, with more than 2000 deaths confirmed. The government, however has acted swiftly and announced progressive measures to ensure financial support for families, workers and companies, whilst stabilizing the national health service. The Italian government has approved a $28 billion emergency package for everything from the health system to small businesses
France has confirmed an economic support package worth nearly 2% of GDP. This package will however put the country in national debt over 100% of GDP. The French government has planned a $50 billion in emergency support for small businesses.
Spain was in lockdown with tight restrictions applied to movements and traveling. The country took a while before agreeing on a financial support plan, which threatened to worsen to crisis. The government announced its plan to stabilize the economy by mobilizing the most resources ever in the country’s history totaling to a staggering €200 billion. They included:
- A €100 billion of loan guarantees which assured liquidity assistance for all companies
- Moratorium on debt payments and utility bills
- €600 million to assist vulnerable people and those relying on social help
This summarizes the picture in Europe during the last 12 months, let’s take a look how it all transpired on the other half of the globe.
China. The country where it all began. Where COVID-19 rose to impact the world in unseen and unpredictable ways. The country enforced the word’s most strict and rigorous lockdown which resulted in China having the strongest economy in the end of 2020 on the back of incredible economic achievements. While other economies took a hit, China has the second largest economy in the world with GDP growing 2.5 % in the last 6 months alone. This is now known all over the world. What everybody wants to know and understand though, is how China managed to achieve this financial wonder during the worst crisis in the last 4 decades. The economy recovered by implementing a plan which prioritized companies and production over market demand, thus boosting trade and exports during a global trade recession. China also decided against issuing a liquidity assistance package, compared to almost every other country in the world. It was a big risk, but it paid off. Success of this magnitude doesn’t happen by plain luck. Several factors need to be in place in order to achieve this.
To be completely honest, the most decisive factor was the strictly implemented plan of lockdown. The rigorous and strict measures combined with consistent methods of testing, tracing and isolating while having the obvious public support even in those extreme conditions, put the country in a unique position of emerging from the pandemic while the majority of Western world was just now plunging into it. The return to work was important and impressive for both privately and foreign-owned enterprises. The success is tangible and not the result of specific Chinese cultural trait. The recovery has been immense across all sectors including public transportation, outside dining and the entertainment scene as a whole. The second factors is without a shadow of a doubt, a series of great policy decisions and changes which could be summarized in a few words. China first, production before demand, global support for recovery and limit of the increase of financial risks. Most global economies had introduced major support in two different forms – Quantitative Easing (UK, France, Spain) by central banks. At the same time the pandemic had created a protracted downturn in both Europe and the US resulting in a gap between a lowered production offer and relatively stable demand which is sustained by financial policy. This was even more evident in countries which had directly subsidized demand incredible welfare and unemployment benefit schemes.
In the 2008 financial crisis, China acted in accordance with central bank and governments in Europe, US and Australia, ultimately providing a huge financial support in credit creation. This time however, it was different. China’s methods to beat the economic crisis were the reverse of the western world. The country revived offer and neglected demand. This was achieved through a massive support by state-owned enterprises, reviving infrastructure projects, approving substantial financial backing of economic digitalization.
Another important decision was imposing profit criteria which was originally created to prevent local government credits. The results were imminent, by October the infrastructure investment grew by only 3.2%. Prices remained low and additional credit did not create market demand. The rationale behind the decision to boost offer but limit monetary creation and abstain from countercyclical policies which support household income and social expenditures, basically to counter everything which the west had applied. The first explanation was to avoid at all costs adding to China’s already large international financial debt. This has been reinforced by the perception of growing financial risk for western economies themselves, giving their incredible use of credit creation and loans. China wanted to avoid that what was happening to Germany at the time. As afore-mentioned everybody in Europe was looking towards the German government for help, ignoring the fact they might need financial assistance themselves. Another important factor was the opportunity to leverage the gap between production and demand in those economies, with a substantial increase of China’s exports. This was significantly successful in certain sectors.
China’s service factor is the force and foundation of the country’s economic growth in the last 2 decades. Similar to most countries, however, it was disrupted by the COVID-19 pandemic. It had potentially long-term dire consequences for financial trajectory. It began that way as well, from late January to mid-April, China’s entire economy was shut down amid lockdown measures to fight the crisis. Service providers such as lawyers and teacher had to move online. The digitalization of those services was a sudden a significant shift. However, time passed and China’s economy stabilized, and not only that, it began to grow.
China’s services sector at a glance
China’s unprecedented economic growth miracle over the past four decades was mainly driven by the production sector, which benefited from an enormous low-cost labor as the country opened to export markets. Now, as labor and land costs are growing and it workforce is increasingly well-educated, China is transitioning to a more sustainable post-industrial services and consumption-driven economy. The retail industry adapted to all the infrastructure and policy changes and began to thrive, thanks to 3 important factors.
- Increased consumer touchpoints and sales conversion. When customers could no longer interact with brands or purchase through the traditional channels, retailers had to expand customer service by using a well-planed combination of online sales and marketing. Livestreaming on social media and online advertising played a huge role in that transition.
- Ensured easy transactions. When the digital transition was already accomplished, companies faced a tough logistic challenge hen dealing with increasing orders and managing overseas supply chains. However, that was handled by implementing a higher waiting period which was explained by the pandemic.
- Assure client retention, using consumer data. Digital retail had allowed a more convenient access to information, making incredible use of data and gaining customer insights which was crucial to attracting the target demography.
This is how the post-COVID-19 market looks like in Europe and China. There is clearly a winner and this time it is not the western world. China emerged amazingly from the pandemic taking bold decision which turned out to be the right ones. Today, China’s economy stands out, they have more capital than any other emerging market.