Gloomy European Commission drives European benchmarks lower

European Commission research published today warned of a ‘deep recession’ this year as a result of the pandemic, which led to impositions of movement restrictions across the continent beginning in February/March stifling economic activity.

The FTSE 100 fell by 1.53% as investors digested a more dire assessment of growth prospects than initially predicted in the European Commission’s Spring 2020 Economic Forecast for this year.

Forecasters now expect growth in the euro-area to fall by 8.7% in 2020 before rebounding to 6.1% next year, as compared to their earlier estimates of a fall of 8.3% and rise of 5.8%, respectively. Inflation expectations for this year and next year, as per the Harmonised Index of Consumer Prices (HICP), are 0.3% and 1.1% in 2020 and 2021, respectively.

Economists believe that risks to the outlook are skewed to the downside and stressed that these projections were based on fairly strong assumptions, including no ‘second-wave’ of infections and continuing easing of restrictions.

Almost jovially noted as the only upside risk to their forecasts was the early availability of a Covid-19 vaccine.

Mention was also made to insolvency concerns, as weaker activity, in spite of monetary and fiscal support, places strain on weaker corporate balance sheets.

One must note that there has been a wave of corporate debt sales with BNP Paribas rising to the top of the European syndicated corporate debt league tables, although there is evidence that companies coming into the pandemic, over-leveraged and with unconvincing business models, are not having as easy a time raising ‘survival’ capital as their more robust peers.

Some like, Flutter Entertainment, who have performed well through the pandemic are even tapping shareholders for growth equity capital to expand their operations in the US and opportunistically capitalise on other opportunities.

Finally, a topic that seems to evade no-one in the UK nowadays, Brexit, was given some coverage in their press release with a stern warning to negotiators on both sides of the English channel that ‘failure to secure an agreement on the future trading relationship between the UK and the EU could also result in lower growth, particularly for the UK’.