The Day at a Glance | June 12 2020

Historical contraction in the European industry

Industrial production in Europe contracted at a record breaking level in April, which reflects the confinement efforts in order to stop the spread of the virus. Manufacturing fell (-) 28% at an annual rate (-17.1% monthly), according to Eurostat data – the greatest fall since 1991, when the indicator started being published. The most affected sectors were consumer durables (-47.7% annual) and capital goods (-40.9%). The four largest economies in the region recorded substantial contractions: Germany (-) 30.2% annual, France (-) 34.9%, Italy (-) 42.5% and Spain (-) 34.3%. Ireland was the only country that recorded expansion (5.5% annual). The European block`s contraction was less than estimated by analysts and it`s expected that manufacturing will recover in the following months, even though risks remain in the horizon: A new wave of the virus could halt the recovery, while a failure to reach an agreement regarding Brexit negotiations could have negative implications on the industry.

Risks in the financial sector could intensify: Banxico

Mexico`s Central Bank published its Financial Stability Report yesterday, in which it assured that, even though the national financial system was impacted by COVID-19 while it counted on a solid position regarding capital and liquidity, some risks could intensify as time moves forward. The high level of unemployment and the loss of revenue in both businesses and households could deteriorate financial institution`s loan portfolios because of the increasing risks of default and a rise in NPLs. In the first quarter of 2020 this phenomenon was still not visible, bout could materialize in the following quarters, given the strong contraction in the economy and the uncertainty associated with its recovery. A longer lasting pandemic would imply additional risks for the financial system as it could deteriorate the position of households and businesses, in addition to driving capital flows towards safe assets, causing volatility in markets, a strong demand for dollars and new liquidity problems. For the Central Bank`s Governor, Alejandro Díaz de León, the Mexican financial system`s agents must intelligently handle risk management regarding credit granting, which necessary to achieve a faster recovery. The liquidity measures recently adopted by Banxico could help, assured Díaz de León.

Transitional period will not be extended: Gove

British Minister Michael Gove confirmed that the government will not extend the transitional period for the UK to exit the European Union, which ends in December of this year. Additionally, he reaffirmed that the time to request an extension has already passed, which is why on the 1st of January 2021, the UK will resume its political and economic independence. The statement was made weeks before the summit between the UK and the EU to assess the negotiation`s advancements to reach a commercial agreement between both economies. If an agreement is not reached new tariffs and regulatory changes will hinder commercial exchanges between both, which will total close to 648 billion pounds (518 billion dollars) a year. The possible impact this could have on the industrial sector raises concerns (especially for the automotive and aviation sectors) as well as on the pharmaceutical and financial sectors. The British economy recorded its worst monthly contraction in April (20.4% month over month) after the virus`s impacts and facing great difficulties to recover, also considering the end of the Europe`s – its main trade partner – preferential treatment. In fact, the OECD estimates that the United Kingdom will be one of the advanced economies that will go through one of the deepest recessions this year. The economic contraction in the last two months alone is equivalent to 18 years of growth in the trend seen prior to the virus. The situation forces, not only greater stimulus on behalf of the government and the central bank, but also an industrial policy that would help minimize the impact of increasing tariffs with Europe in a scenario of a Brexit without a trade agreement. The implications for Europe are also a concern: Total exports to the UK represent 2.3% of Europe`s GDP, with Holland, Ireland and Germany`s economies being the most affected.