What a multispeed recovery means for Europe’s corporates

Europe’s economy has been hard hit by Covid-19 – and the recovery will present companies with numerous challenges.

April 24, 2020

With parts of Europe tentatively reopening for business and other countries still in lockdown, multinational corporates will need staggered plans to get their region-wide operations up-and-running again.

Many companies are now in uncharted waters. Unlike the previous economic crises, the Covid-19 outbreak has caused issues with cashflow rather than the banking system and credit is still available. The problem lies in the current uncertainty about what happens next.

And with each country reacting to the outbreak differently, there’s less co-ordination in policy, even within the eurozone.

So what can companies take away from the current economic picture as they plan for a potential return to the office in the coming months?

David Rea, chief economist for EMEA at JLL, looks at how Covid-19 is playing out across Europe.

Big questions remain over the shape (U,V or L) of the economic recovery and the length of time it will take. What are the factors influencing how European countries will emerge from the Covid-19 outbreak?

Countries across Europe have taken very different approaches to the Covid-19 outbreak with the severity of the measures, the duration of the lockdown and the fiscal stimulus made available all impacting on their economic recovery.

Underlying economic health is of course also a factor; we’d expect Italy to take longer to recover than some of its north European peers. While Italy’s prime minister continues to call for the European Union to use its full firepower and pool European debt into coronabonds, there seems to be little consensus policy across the bloc. There’s no single path; Italy is five weeks and Germany and the UK are around nine weeks behind China.

Corporates operating in Europe know they need to make contingency plans but the outlook is extremely hazy right now. What are the biggest challenges they’re facing?

Broadly speaking, the immediate uncertainty makes long term decision-making impossible right now. As does the lack of live data given monthly lags. Pricing risk, cashflows and asset management are significant challenges. Corporates can, of course, look to China and the green shoots of recovery we see there.

They are reasons for hope, but recoveries will vary greatly from region to region, nation to nation and city to city. The challenge for those with footprints across multiple geographies is really in finding a way through the short and medium term. Equally, the recovery may not be a straight line; false starts are likely, and restrictions may need to be re-introduced in the coming months.

When we talk of recovery, there’s more than one economic scenario in mind. What does it mean for inflation?

Each country will go through its own dynamic. Where there is a short crisis and V-shaped recovery, then I expect a rebound in inflation to slightly above normal or targeted levels, with inflation then running at somewhere between three and five percent.

This would require supply and demand sides to have been only slightly negatively impacted. In that scenario, when the recovery gets underway, you get what is beautifully called “revenge spending” in China; essentially pent-up demand and a big rebound in spending as people enjoy going back to shops and stores, they replace a backlog of worn-out items, get their cars fixed and their hair cut. This bounce in inflation would be temporary, lasting up to a year.

But that may not seem likely in those countries which have been most affected?

A downward economical spiral would mean very low or negligible inflation. No business can put up prices in a recession and inflation would run at between zero and one percent for up to two years.

Anything other than a short crisis means a larger impact on the productive capacity of the economy. More substantial softening of the supply side (more insolvencies, firm dissolutions) would affect the demand side through redundancies and lost confidence.

Conversely, certain sectors could see serious upward pressure on prices. This could come through an increase in operating costs, such as increased debt servicing costs as a result of increased debt. Or it could come through shortages and supply chain disruption, which would first cause a squeeze on margins and profitability. Then if the competitive and political pressure allows it, there would be upward pressure on prices.

Looking at the bigger picture, what does a multi-speed European recovery mean for globalisation? And particularly for companies with multiple locations?

Covid-19 doesn’t spell the end of globalisation but it does give a boost to populists pushing in the opposite direction and global networks will be impacted.

Near-shoring and even re-shoring is a possibility as companies reflect on how their response to the global pandemic can be improved and how to reduce risks to their supply chains to better safeguard business. This could have implications for company structures and management. 

And of course, we don’t know how long social distancing measures will stay in place for – flexibility and agility will be key for companies during the recovery phase.

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