German economy in recession as coronavirus hits – business live

Some of the earlier enthusiasm among European investors has tailed off, with market gains diminishing. Some indices are now in the red:

• FTSE 100: +0.6% at 5,775

• Germany’s DAX: +0.7% at 10,412

• France’s CAC: -0.1% at 4,267

• Italy’s FTSE MIB: -0.1% at 16,846

• Spain’s IBEX: -0.7% at 6,502

• Europe’s STOXX 600: +0.3% at 328

US futures are down, indicating a drop of roughly 1% for the Dow, S&P and Nasdaq when Wall Street opens. A revival of fears over the US-China trade wars adds to concerns about the impact of the coronavirus crisis.

Brexit.. remember that? Round 3 of negotiations with the EU have ended with “very little progress” towards an agreement according to David Frost, the UK’s chief negotiator.

According to Reuters, he said the major obstacle proved to be the EU’s insistence on including a set of novel and unbalanced proposals on the so-called “level playing field”.

Frost said “we very much need a change in approach for the next round of talks beginning on 1 June.”

The UK intends to make public all the UK draft legal texts next week so that the EU’s member states and “interested observers” can see the UK’s approach.

The eurozone economy will shrink by 8.1% this year, before bouncing back with 6.5% growth in 2021, according to forecasts from economists at HSBC.

They expect policymakers at the European Central Bank, led by Christine Lagarde, to extend its emergency Covid-19 package by €500bn at their 4 June meeting. In March, the ECB announced a €750bn asset purchase programme (known as PEPP), targeting both public- and private-sector assets.

Simon Wells, chief European economist at HSBC, says:

In the face of ballooning public finance deficits and the ever-present threat of market pressure on fiscally-weaker countries, the ECB remains the main game in town for preventing debt crises that could threaten the stability of the euro. At the ECB’s recent purchase rate, it will have exhausted the €750bn PEPP by end-September. Significant PEPP expansion could help allay market concerns for now, even if it isn’t a lasting solution.

Although we now expect a slower rebound [in eurozone growth in 2021], it is still very swift by historical standards. This reflects the unusual composition of the recession. Typically, household spending holds up relative to investment through a slump as firms slash capex. This time, we expect a double-digit drop in consumption and a sharp spike in savings. But as lockdowns are eased, consumer spending could rise rapidly – provided the furloughing measures, fiscal cushions and central bank lending schemes work.

Investors have welcomed the news that Rico Back is no longer running Royal Mail, with shares up 8% this morning at 175p.

The company said he was leaving immediately, less than two years after being appointed chief executive, as it announced a £22m drop in revenues in April, mainly due to a sharp drop in letter volumes which were down by a third.

Russ Mould, AJ Bell’s investment director, gives his take on the news:

The middle of a global crisis feels like an odd time to part ways with a CEO, particularly one who has been in post for as short a time as Royal Mail’s Rico Back.

With his P45 delivered, Back is being given more time to enjoy the Swiss penthouse from which he has reportedly been running the company.

The best hint at the reasons behind his departure is the company’s statement that interim executive chair Keith Williams will lead discussions on ‘an accelerated pace of change across the business’.

Royal Mail’s board will need to move fast to appoint a successor given the big challenges facing the business and the market will want to hear more as promised when full year results are posted on 25 June.

The bonus to be paid to frontline staff and withdrawal of incentives for the executive team may go some way to mending fences with a disgruntled workforce.

Read our full story here:

Other UK companies at risk of falling into S&P’s “fallen angel” category (when a debt issuer’s rating is cut to junk from investment grade) this year include:

• Next
• British Airways
• ITV
• Ashtead
• Kingfisher
• Virgin Money

Commenting on the trend globally, S&P said:

The financials sector led the additions to the potential fallen angels list [for 2020], highlighting the challenges the sector is facing.

However, we see the highest downgrade potential in the lodging and leisure and auto sectors, which have the greatest number of potential fallen angels that have ratings on CreditWatch negative.

In other news, the number of companies or countries at risk of having their credit ratings cut to junk from investment grade has been pushed to a record high of 111 by the coronavirus pandemic, according to research by S&P global ratings research.

The number of so-called ‘fallen angels’ has so far this year reached 24, with more than $300bn in rated debt, S&P estimates. The 111 potential fallen angels have another $444 billion of bonds, suggesting the amount is likely to spiral further.

Sudeep Kesh, head of S&P global credit markets research explains the significance:

Potential fallen angels are significant because the loss of investment-grade ratings typically carries both higher capital costs and sometimes the need to revise contracts with bondholders to protect investors – further adding to capital costs – or worse, could lead to the sale of the bonds in favour of more creditworthy companies.

Companies that have fallen into this category already this year include financial institutions, utilities, and one each in aerospace and defence, consumer products, media and entertainment, metals and mining, property, and transport.

Of the 24 companies to have reached “fallen angel” status so far this year, higher street retailer Marks & Spencer is the only one from the UK.

Others include France’s Renault, and several in the US including Royal Caribbean Cruises, Ford, Delta Air Lines, Macy’s and Kraft Heinz.

Unlike Germany, the eurozone as a whole is not yet in recession. The good news ends there.

It is the steepest quarterly downturn since before the euro was created, and since comparable data was first collected in 1995, according to Eurostat, the European commission’s statistics office.

It was a 3.3% decline across the whole EU, which also includes countries such as Sweden and Finland, which were not as badly hit – potentially because of less severe lockdowns.

The UK’s GDP dropped by 2% in the quarter, less than countries that locked down earlier such as Italy and France, which suffered quarterly GDP declines of 4.7% and 5.8% respectively.

Eruzone GDP fell by 3.8% quarter-on-quarter in the euro zone in the first quarter of 2020, according to a flash estimate from the EU’s statistics agency released on Friday.

Germany is in recession, and worse is coming, said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics:

The German economy has been tip-toeing on the edge of recession since the beginning of 2019, but it can hide no longer. The revision to Q4 means that the economy entered a technical recession at the start of the year, and this before the incoming collapse in Q2 activity.

Q2 will be orders of magnitudes worse, though we suspect the German economy will continue to “outperform” its EZ peers. In addition, employment was hardly affected by the Covid-19 epidemic in Q1, rising by 0.3% year-over-year in Q1. This is consistent with the fact that the labour market is a lagging indicator.

But it also reflects the fact that the jump in the use of the short-time work scheme, Kurzarbeit, means that workers remain employed, even if they are, strictly speaking, furloughed.

Jack Allen-Reynolds, senior Europe economist at Capital Economics, said:

[The release] confirms that the government’s less stringent virus containment measures mean that the economy is not faring as badly as the other major euro-zone countries. That said, the crisis is still taking a heavy toll.

For comparison, the declines in GDP in France and Italy were much deeper, at 5.8% and 4.7% respectively. This will have been partly because strict social distancing measures were not introduced in Germany until 22nd March, compared to 10th March in Italy for example. But the lockdown was also less stringent, which allowed the construction sector, for example, to record an expansion of 1.8% m/m in March. That compares to a 40.2% m/m drop in construction in France.

Further ahead, we have pencilled in a much bigger decline in German GDP in Q2 of about 10% q/q. The lockdown is being eased in May and June, but only gradually, and Germany’s recovery will be constrained by the problems elsewhere in Europe.

German GDP in the first quarter was 2.3% lower than the same quarter in 2019, also the biggest annual drop since the financial crisis.

It was a 7.9% year-on-year drop then, which is widely expected to be beaten in the second quarter.

Household spending fell sharply, investment in machinery fell, but government spending held up, following patterns elsewhere. Exports and imports both fell, reflecting the global decrease in international trade.

However, the data have not moved the euro very much: it is up by less than 0.1% against the US dollar at $1.0813.