of service sector turnover1Source: EIB staff calculations.
Note: 1 Seasonally and calendar day adjusted. 95% confidence intervals in square brackets.
As long as compliance with restrictions is high, the policy stringency indicator appears more useful than the mobility data in assessing economic activity. Google’s mobility indicator can be seen as a measure of compliance with the restrictions and might therefore be a more direct measure of activity. However, the mobility indicator shows pronounced seasonal variations, which detract from the underlying momentum in activity. For example, it declined during the summer holidays in August. And so far, surveys do not seem to suggest that compliance with restrictions is significantly declining in EU countries (Institute of Global Health Innovation, 2020).
The impact of the coronavirus pandemic varies substantially by sector. Sectors that rely significantly on physical presence, including passenger transport, the arts, entertainment, tourism and hospitality, were hit the hardest, declining by some 30% in the second quarter of 2020 from the first quarter. Others, such as agriculture, finance or real estate, contracted by 3% or less over the same period. The distribution of the economic impact across the various sectors was very different during the global financial crisis, when EU manufacturing sustained the largest decline – nearly 20% in the first quarter of 2009. The drop in other sectors remained relatively contained at near or below 6%.
The sectoral distribution of the decline will have a decisive impact on the speed of the economic recovery in the near to medium term. The industrial sector’s share in the overall decline in 2020 is the same as during the global financial crisis, while that of services is much higher (Figure 12). Given that a large part of the contraction in services is due to their being delivered in person, as is the case in passenger transport or accommodation, the recovery of a large part of the services sector will remain subdued until the pandemic is reined in, especially as many government restrictions on economic activity were being reintroduced in the fourth quarter of 2020. On the other hand, the recovery of the industrial sector, where manufacturing dominates, is dependent on the upturn in international trade. The different speeds of recovery exhibited by manufacturing and services became clear over the summer when the industrial sector bounced back fairly quickly, while certain services lagged significantly behind.
Figure 12
Gross value added of all industries (% change vs. the same quarter in the previous year)
Source: Eurostat and EIB staff calculations.
Note: The regions of Europe are referred to simply as Western and Northern, Southern, and Central and Eastern in subsequent charts throughout the Investment Report.
The speed of the recovery is likely to be uneven across the European Union. The decline in services, especially trade, transport and hospitality, is much larger in Southern Europe than in the rest of the European Union. Because these services represent a large share of the economies of Southern Europe, they will weigh significantly on the recovery, both weakening it and stretching it out over time.
Box B
The pandemic’s impact on GDP: A historical perspective
The extent of the expected economic decline in 2020-2021 rivals the steep drop in activity that followed the global financial crisis. It is therefore worth comparing the intensity of the ongoing economic crisis to the global financial crisis, which could provide insight into the likeliest paths to recovery. To this end, this analysis compares the expected decline in GDP in 2020-2021 (defined as the COVID-19 recession) with the worst two-year cumulative losses in GDP and with the global financial crisis for individual countries. One obvious caveat is that the 2020 and 2021 forecasts might turn out to be quite different from the actual data given the high uncertainty surrounding the recovery.
Figure B.1
Cumulative two-year contractions – comparison with the global financial crisis
Source: Penn World Table, Eurostat, IMF and EIB staff calculations.
Note: GDP forecasts for 2020 and 2021 are based on the European Commission’s July 2020 forecast and the IMF’s June 2020 WEO update (IMF, 2020b). For almost all advanced economies, the starting year of the analysis is 1950. However, for some countries, data only becomes available as late as 1990 (such as for many Central and Eastern European countries).
The global financial crisis is identified as the worst crisis in post-World War II history for many countries in Western and Northern Europe (Figure B.1). In Southern Europe, it sits close to the COVID-19 crisis. The expectations of a rebound in 2021 make COVID-19 a relatively short-lived recession. This latter forecast is also based on the assumption that the health crisis will be resolved in 2021.
Figure B.2 illustrates the comparison from a different angle. The vertical axis shows the percentage of two-year cumulative decline and the percentage of those contractions that are worse than the 2020-2021 result for the total sample. In general, the figure depicts the well-known fact that mature economies are more stable and less susceptible to frequent declines in output. For nine countries, all two-year periods of contraction were harsher than the 2020-2021 crisis. The countries of Central and Eastern Europe experienced dramatic losses after the fall of Communism with the entire economic system wiped out, which explains why for most of them the decline in 2020-2021 is smaller than previous declines. For Southern European countries, however, the decline from the pandemic stands out as one of the harshest contractions since World War II.
Figure B.2
Frequency of contractions and worse-than-2020 contractions (in %)
Source: Penn World Table, Eurostat, IMF and EIB staff calculations.
Note: GDP forecasts for 2020 and 2021 are based on the European Commission’s July 2020 Forecast and the IMF’s June 2020 WEO update (IMF, 2020b). For almost all advanced economies, the starting year of the analysis is 1950. However, for some countries data availability starts as late as 1990 (such as for many Central and Eastern Europe countries). The green bar shows the number of contractions that are bigger than the 2020-2021 decline as percentage of all years in the sample. When the two bars are equal, all contractions until 2020-2021 have been worse than the current contraction.
Aggressive policy measures soften the blow of unemployment across the European Union
Labour productivity, measured as GDP per hour worked,
