Economic environment

Economic development was shaped above all by the coronavirus pandemic and the associated restrictions in 2020. At the beginning of the spring, the rapidly rising Covid-19 figures in the eurozone led to some harsh restrictions on business activities. This was accompanied by an unprecedented recession affecting almost all sectors of the economy. As a result, GDP in the eurozone fell by approximately 15 per cent cumulatively in the first half of 2020, and industrial production in April 2020 was almost 30 per cent below the level at the beginning of the year. Unlike in previous crises, sharp fluctuations were observed not only in cyclical sectors, but also in the service sector and private consumption.

Starting in May 2020, economic activity in the eurozone rose again once the restrictions were relaxed, and some areas were even able to catch up with pre-coronavirus levels again. However, this should not hide the fact that production output and consumer demand lost in the spring were not compensated by a long shot, and that overall economic output in the third quarter was still around 4 per cent below the levels at the end of 2019. To control the rapidly increasing spread of Covid-19, some severe restrictions were reintroduced in Europe from September 2020 onwards, particularly in November 2020. The service sector in particular and therefore private consumption were also severely affected by this. In the winter of 2020/2021, we therefore expect a further decline in macroeconomic activity, but it is likely to be significantly less extreme than in the first half of 2020.

The slump in consumer demand caused by the business environment also put a dampener on inflation. While inflation was still at 1.4 per cent p.a. at the beginning of 2020, and the rate of inflation slipped in to a negative range from August onwards. The ECB responded to the coronavirus crisis and its accompanying effects with a comprehensive easing of monetary policy. It offered additional refinancing possibilities for banks, while making the conditions for targeted long-term refinancing transactions much more attractive. The existing bond acquisition programme, worth €20 billion per month, was supplemented by an envelope of €120 billion by the end of the year and a pandemic emergency purchase programme (PEPP) at an initial total of €1,350 billion. Overall, this succeeded in preventing distortions in the financial system and ensuring favourable credit supplies to the public and private sectors.

Following the strong increase due to the coronavirus crisis, risk premiums in the eurozone fell sharply over the course of the year and are currently at approximately the same level as at the beginning of 2020. Returns have also declined generally and in some cases are at new all-time lows. One of the main reasons for the decline in the spreads for euro government bonds since the pandemic broke out was the ECB’s significant monetary easing policy, in particular the bond purchase programmes, which reduced the net liquidity available on the market. In addition, the reconstruction assistance planned by the EU strengthened investor confidence in the creditworthiness of the eurozone countries: direct borrowing by the EU, which ensures low-cost financing, is intended to provide grants and loans to the member states. The expectations with regard to the immunisation programmes that have now begun and the anticipated economic recovery were and remain an additional factor in the decline in risk premiums.