Currently, short-term economic downside risks in Europe are increasing for the first quarter of 2021 after an already difficult fourth quarter of 2020. This seems to be a continuation of 2020 in parts. In 2020, we were all confronted with barely known economic downside risks. Some of us also remember the tense situation on the financial markets in 2008 — and at the beginning of the COVID-19 crisis, the tensions on the international capital markets were in part as systemically critical as in 2008. However, many other surrounding conditions are currently much more favorable than during the last global economic crisis.
Thinking ahead, there is currently much to remind us of 2010. Back then, too, many economic actors and forecasters underestimated the unfolding upswing at the beginning of the year on a global level and especially in individual countries. This is especially true for economies that were not shaped by massive economic imbalances, that were able to benefit from the global recovery and where a lot of fiscal stimulus was put in place — such as Germany at the time. Germany was able to post GDP growth of 4% in 2010; after a slump of -5% in 2009. In the euro area it was “only” just over 2% in 2010, but here there was a lot of structural adjustment needed in some (larger) euro area member countries back then.
In CE/SEE, too, the 2010 rebound was rather hesitant and some countries there even recorded negative GDP growth rates in 2009 and 2010 (e.g. Romania, Croatia) or only a very hesitant recovery took place (e.g. Hungary). In total, the CE/SEE region (excluding Poland) was only able to record GDP growth of just under 1 % in the following year after a GDP slump of approx. -5.5 % in 2009. But here, too, the “brake on the upswing” was in part a considerable need for structural adjustment. In some cases, as in the euro area, current account imbalances had to be reduced or pro-cyclical consolidation policies implemented. The financing environment was also difficult. The positive outlier in CE/SEE at the time was Slovakia, which after a severe GDP slump of over 5% (2009) was able to post GDP growth of over 5% again in 2010. It benefited from the absence of structural imbalances, Germany's fiscal commitment and trade openness. And all in all, we see the environment in Europe for 2021 more like that in Germany or Slovakia in 2010.
Real GDP (% yoy) |
Eurostat, national sources, IMF (for DE forecasts), RBI/Raiffeisen Research |
World trade & financing situation in 2009/10 not comparable with 2020/21
We believe that the 2010 rebound took place under conditions that were in part more difficult than at present or as we expect them to be in the further course of 2021. This is true at the global level, but also for Europe and especially Central and Southeastern Europe (CE/SEE). The 2008/09 crisis was accompanied by a massive reduction in cross-border bank exposures. This is true at the global level, where cross-border bank exposures decreased by about 20% in 2008, and especially for bank exposures to CE/SEE. These also declined by over 10 per cent from June 2008 to June 2009 (minus EUR 140 billion). In contrast, these cross-border bank exposures actually increased (slightly) during the COVID-19 crisis. This is true at the global level (+8% from Q4 2019 to Q3 2020) and in CE/SEE (+10%).
Difficult financing conditions affected global trade negatively in 2009 and 2010. Currently, global trade is recovering much faster than in 2009/2010, with many signs pointing to high single-digit or double-digit growth rates in global trade in 2021. Moreover, we currently see a clear economic policy coordination in Europe and CE/SEE towards an expansionary monetary and fiscal policy stance in unison. This was not the case in the aftermath of the last crisis. In this respect, we expect clear impulses in 2021, which should last well into 2022.
Global cross-border claims (USD trillion) |
BIS, RBI/Raiffeisen Research; latest data as of Q3 2020 |
CE/SEE banking exposures (USD bn) |
BIS, RBI/Raiffeisen Research; consolidated cross-border claims, latest data as of Q3 2020 |
2021 GDP recovery in Europe and CE/SEE should be stronger than in 2010
Overall, as outlined above some factors thus even point to more catch-up and rebound potential. Short-term cyclical dynamics in 2021 could even be stronger than in 2010. Of course, a precise GDP point estimate for the euro area in 2021 will ultimately depend on the upcoming GDP figures for Q4 2020 and the progress in containing the pandemic. But given the factors outlined above and the prospect of vaccine success in 2021, we continue to expect euro area GDP growth of at least 3-4% in 2021. Our current point forecast, which has been valid for some time, is 4.3%. We never expected a rebound with GDP growth of 5-6% like some other forecasters, because we always assumed a difficult coexistence between the economy and virus in the winter half-year 2020/2021. But after the unseen and partly forced decline in private consumption of -8% in the euro area in 2020, this figure — if consumption is possible again — should just increase by 4-5 percentage points in 2021 (for comparison, private consumption in the euro area declined by only 1% in 2009). And the strength of rebound effects has been shown to us by the figures for Q3 2020, where the strong upswing at that time was driven by the domestic as well as the external economy.
We expect a partly similar scenario as in Q3 2020 for 2021 and H2 2021 in particular. The rebounding international economy and pent-up consumer spending will boost domestic demand, while the more or less parallel easing of restrictions in many European countries should boost exports at the same time. We expect GDP growth in CE/SEE to average around 4% in 2021 and thus a more significant rebound than in 2010 or 2011. We think that the trade-open CE/SEE countries in particular can benefit from the environment outlined. All in all, we remain optimistic about 2021 — even if we should not forget that the recovery will remain incomplete. In Europe — one of the hardest hit regions of the world at the economic level in 2020 – we will hardly be able to make up for the 2020 slump in 2021.
World trade (Volumes, Index, 2010=100) |
CPB, RBI/Raiffeisen Research |
Lessons from emerging markets crises a reason for our optimism
We also think that this time developed economies or economists from such countries can learn a lot from typical (country-specific) emerging market crisis experiences. Here, there have often been macroswings as severe as those we experienced in 2020 in developed economies. And a deeper look at emerging market crises teaches us that there are often significant rebounds here once the specific root cause of the severe slump and/or the previously prevailing lack of confidence is quickly overcome (be it after an oil price collapse, after a currency crisis, after a debt restructuring, after a banking crisis, after a political crisis) .... and if there are no massive country-specific economic imbalances and the global environment is favorable.
This article reflects some key messages that we will also present at the RBI CEE FX WEBINAR: 2021, A YEAR TO BE OPTIMISTIC. Read more in the latest RBI IC Client Newsletter.
Gunter Deuber is heading the Economics and Financial Analysis division (Raiffeisen Research) at Raiffeisen Bank International (RBI) since 1 January 2021. Since 2011, Gunter Deuber has held leading positions in RBI's Economic and CEE Research and has continuously expanded the cooperation with his research colleagues in RBI’s subsidiary banks in CEE. Since the early 2000s, he has been analysing economies, banking sectors and market topics with a focus on CEE and EU/euro area topics for RBI in Vienna, but also in the international (investment) banking context in Frankfurt. He regularly presents the views of Raiffeisen Research and his research team at meetings with investors and clients. He is a well sought-after speaker at landmark events in the finance and banking industry and a guest lecturer at several universities/teaching institutions. In 2019, he was nominated for the US State Department's IVLP (International Visitor Leadership Program). Gunter has published several edited volumes on Euro/EU crisis issues and published various articles in professional journals and industry magazines. Outside the office, Gunter enjoys travelling with his family and long-distance running.