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Report from
Europe
Covid-19 puts Europe into lockdown and rewrites
economic forecasts
Economic forecasts issued only a few weeks ago in
Europe, which projected continuing slow increase this
year in GDP and business activity in sectors critical to the
timber industry, such as construction and furniture, will
need to be completely revised in the face of the Covid-19
outbreak.
Issues like Brexit, enforcement of EUTR, the slowing pace
of manufacturing in Germany, and the US-China trade
dispute, that only a few weeks ago seemed likely to lead
the narrative of changing demand for tropical wood
products in Europe during 2020, have taken a back seat in
response to the transformative effects of the pandemic.
In the last two weeks, large parts of Europe have been put
into lockdown to control spread of the virus. Schools and
universities, and most shops, bars, restaurants and other
public venues have been forced to close. People are being
ordered to remain at home. Public transport is being
reduced to a skeleton service for essential workers.
Manufacturing and construction activity is continuing in
Europe but at much reduced levels and pressure is
mounting to stop altogether to prevent any further spread
of the virus.
Governments in Europe, as elsewhere, face a tough choice
to strike the right balance for the health and welfare of the
population. If they bring industry and construction to a
halt along with the entertainment and travel sectors
already shut down, the resulting recession could inflict
lasting damage on their economies; if they do not,
commuters and workers could fall ill and continue to
spread the virus, prolonging the health crisis and the
economic downturn.
The response to the pandemic has varied to some extent
across Europe, dependent partly on differences in political
culture and regulatory and enforcement regimes, partly on
the timing and extent of the spread of the virus, and partly
on the capacity of health services to respond.
Lockdown in Italy since 9 March
The lockdown began in Italy with an emergency decree on
9 March covering the Lombardy region, Italy's financial
and industrial powerhouse and home to much of the
country's design and fashion sectors, together with 14
other northern provinces including Venice, Parma and
Treviso. The lockdown was extended to the whole of Italy
on 21 March.
All population movement in Italy has been banned except
for health and other urgent reasons. Schools, universities
and all non-essential businesses have been required to
close ¡ª with supermarkets, banks, pharmacies and post
offices the only businesses allowed to remain open.
The economic shutdown in Italy is not absolute, Giuseppe
Conte, the Italian Prime Minister having stated that ¡°we
will slow down the country¡¯s productive engine, but we
will not stop it¡±. However, his government has ruled that
any business or factory that was not ¡°strictly necessary,
crucial or indispensable¡± must shut until April 3 when the
decision will be reviewed.
Italian trade unions have argued that these measures are
not strict enough to protect workers. But Confindustria,
the business confederation, wrote to Mr. Conte to ask him
to ensure essential supply chains and support services that
allow companies to keep working were maintained.
General confinement order in Spain
Similar measures have been progressively extended into
other European countries. The Spanish government issued
a general confinement order for more than 46 million
people on 14 March.
Initially the regulations in Spain were less stringent than in
Italy, with Nadia Calviño, Spain¡¯s deputy prime minister
for the economy, emphasising the need to ¡°safeguard
[labour] activity and employment so that there is an
adequate base to return to growth when we leave this
health crisis behind¡±.
This emphasis has allowed construction work to continue
in some areas in Spain, but as the number of Covid-19-
related deaths and cases have mounted, there has been
rising pressure from trade unions and some regional
administrations for an Italian-style comprehensive stay-athome
order for all workers except those providing key
services.
France aims to avoid complete stoppage of economy
The lockdown in France started on 17 March when the
government banned all public gatherings and told the
country¡¯s 67 million residents to stay inside except for
grocery shopping and other essential tasks.
Unlike Italian Prime Minister Giuseppe Conte, the French
government has repeatedly called on companies to stay
open and on workers to show up for their jobs even if they
are not in essential services such as food supply.
The French government has also reached an agreement
with trade unions in the construction sector, an important
driver of the economy that accounts for 1.5m jobs and
nearly 6 per cent of GDP, to continue operations ¡°to avoid
a complete stoppage of building sites, which would not
only undermine the businesses involved but also the whole
economic supply chain¡±. This is subject to measures being
put in place to protect workers.
Belgium and Netherlands keep ports open
Belgium has been in lockdown since March 18 and
implemented tough enforcement measures. The country's
11.4 million residents have been ordered to stay at home
and to avoid outside contact as much as possible.
People are only allowed to leave home to visit the doctor,
buy food or assist others in need. Police are patrolling the
streets and have the power to enforce fines on those not
abiding by the restrictions.
However, the Belgian prime minister asked for important
sectors of industry to keep their activities going. The port
of Antwerp, a major hub for imports of wood and other
commodities into the whole of the EU, subsequently
confirmed that the entire port is fully functional and will
remain so in the future.
Unlike most other European countries, the Netherlands has
so far stopped short of ordering people to remain at home.
Instead, in a series of measures issued on 12 March, the
Dutch government has asked that people stay at home as
much as possible, banned gatherings except those
¡°necessary to ensure the continued daily operations of
institutions, businesses and other organisations¡±, and is
encouraging other social distancing measures.
Since the Netherlands plays a vital role in European
supply chains, the Dutch government has specifically
identified air and sea freight chains, road transport, as well
as food and medical supply chains as vital processes in
view of Covid-19. Government support is being provided
to ensure employees vital to the operation of these chains
can go to work without interruption.
Germany progressively tightening restrictions
The German federal government has not so far
implemented a nationwide lockdown in response to Covid-
19, although state governments across the country have
progressively tightened restrictions on movement,
prohibiting large gatherings, calling on people to stay at
home, and asking that they observe other social distancing
measures in an effort to stop spread of the virus.
On 22 March, the German state of Saxony joined Bavaria
and the Saarland in prohibiting residents from leaving
their dwellings except for good reasons.
However, the German government has stressed the need to
keep key sectors of the national economy functioning. The
three largest contractor associations in Germany ¨C ZDB,
HDB and BVMB - have jointly welcomed a German
government decree for construction to continue despite the
crisis and, on 25 March, stated that they ¡°are currently
making great efforts to maintain construction site
operations¡±.
UK lockdown from 23 March
The British government ratcheted up Covid-19 controls
from mid-March, culminating in an order for a lockdown
on 23 March, limiting people to trips outside the home
solely for grocery shopping, medical needs and traveling
to work if working from home is not an option. All nonessential
businesses were ordered to close.
However, the UK government also said that builders on
sites should continue to work but that they must practice
social distancing. Some construction companies, arguing
that this is impractical, have shut down all sites, while
others are continuing.
The UK government has also stated that work carried out
to repair and maintain houses should continue, and that
¡°hardware shops¡± can stay open, allowing some large DIY
chains to remain operational.
An initial insight into the impact of Covid-19 on the
timber sector in the UK can be derived from a Timber
Trade Federation member survey published on 20 March.
Around two thirds of the respondents reported a drop in
demand for timber as the sector prepares for six to twelve
months of disruption.
The impact on businesses was reported as ¡®medium¡¯ by
half of the respondents, while a quarter reported the
impact as minimal and the remainder as high.
UK timber businesses are reporting they are taking
precautionary measures, including cancelling physical
meetings and switching customers visits with phone calls
and other digital technologies. More than 80% of
businesses have limited travel for staff, and a third are
reporting some impact to their operation from employees
who have needed to self-isolate as a precautionary
measure.
Currently UK timber businesses are reporting that they
expect these containment measures to run for three months
and projecting that demand be restored between Q3 2020
and Q1 2021.
First indications of scale of European downturn
The first clear indications of the wider economic effects of
Covid-19 across Europe came with publication of the IHS
Markit ¡®flash¡¯ composite purchasing managers¡¯ index on
24 March. The index has dropped to its lowest reading
since the series began in the 1990s in both the eurozone
and the UK.
The eurozone index fell from 51.6 in February to 31.4 in
March, while in the UK the index dropped from 53 to
37.1. A reading below 50 indicates the majority of
businesses reported a deterioration compared with the
previous month.
The ¡®flash¡¯ PMI data were based on responses collected in
mid-March, before the most severe elements of national
lockdowns had been implemented, which means the data
for April are likely to be even worse.
Chris Williamson, chief business economist at IHS Markit,
said the survey data for mid-March is consistent with an
annualised 8% decline in eurozone and UK GDP, and that
the expanding lockdowns means ¡°it is unlikely that the
index has hit rock bottom yet¡±.
The most severe downturns in activity recorded by the
PMI were in consumer-facing sectors, notably hotels,
restaurants and other leisure-based activities, while there
were record falls in the transport and travel sectors. The
index for the eurozone¡¯s services sector dropped from 52.6
in February to 28.4 in March, also the lowest ever
recorded. The PMI for UK services plunged to 35.7,
another unprecedented low.
Although contracting at a marginally slower pace, the
eurozone manufacturing activity index fell over nine
points, from 48.7 to 39.5, the largest monthly contraction
since April 2009. Britain¡¯s manufacturing activity PMI fell
by less, to 48.0 from 51.7.
IHS Markit said that even these figures under-estimate the
decline in manufacturing because they reflect an upward
distortion due to the positive impact on the index of
lengthening delays from suppliers, usually a sign of a
sharp rise in demand, but in this case caused by Covid-19.
European governments act to mitigate economic
effects of pandemic
European countries have engaged in unprecedented and
swift fiscal measures to tackle the economic crisis caused
by Covid-19 and the preventive measures to ¡°flatten the
curve¡±. To date, European governments have committed at
least $1.5 trillion in spending and loan guarantees in a
desperate bid to protect business, workers and families
from the worst of the pandemic-induced pain.
National measures have taken a similar form across
Europe and have included a combination of direct fiscal
stimulus, short-time work schemes, and guarantees and
liquidity support for companies with financing problems.
According to Eurogroup President Mario Centeno,
eurozone member states have, on average, adopted fiscal
stimulus measures of some 2% of GDP and guarantee
schemes of some 13% of GDP.
The rise in national spending has been facilitated by an
unprecedented decision of EU member states on 23 March
to suspend the Stability and Growth Pact obligations.
EU finance ministers approved the Pact¡¯s ¡®general escape
clause¡¯ to pause the structural adjustments that countries
must implement to meet their fiscal targets. The clause can
be activated only in response to a ¡°severe economic
downturn¡± in the eurozone or the EU as a whole.
The decision was taken on condition that actions by EU
countries are ¡°timely, temporary and specific¡± and that
additional spending is dedicated only to fighting the
pandemic and relaunching the economy, especially in
support of SMEs and the most affected sectors and their
workers.
On 19 March, the European Central Bank announced a
huge increase in quantitative easing within the eurozone in
an effort to keep the financial system liquid when
investors are running scared. The ¡®Pandemic Emergency
Purchase Programme (PEPP)¡¯ mandates the ECB to buy
up to an additional €750 billion government and corporate
bonds.
The PEPP brings the ECB's planned purchases for this
year to 1.1 trillion euros, its biggest annual amount ever,
with the newly agreed buys alone worth 6% of the euro
zone¡¯s GDP.
Meanwhile negotiations between EU finance ministers are
on-going on an EU-wide fiscal stimulus package that
would come on top of the national initiatives to address
the economic fallout of the virus. Essentially, ministers are
trying to decide on the role, if any, of the European
Stability Mechanism (ESM) in tackling in the economic
fallout from the pandemic.
The ESM has €410 billion available financed by members
of the eurozone set aside to address the European
sovereign-debt crisis and help euro area countries in
severe financial distress. It provides emergency loans to
countries committed to reform programmes.
One option would be for the ESM to issue common debt in
the eurozone in the form of bonds to mitigate the
economic impact of Covid-19. These temporary
eurobonds, or ¡®coronabonds¡¯, would particularly help
countries with higher borrowing costs that are also most
affected by the pandemic, such as Italy and Spain.
However, this option still seems unlikely given staunch
resistance from some member states, including Germany,
the Netherlands and Austria. More likely is that the ESM
will be used to provide precautionary credit lines for
member states requesting temporary help.
In the last week of March, discussions were on-going on
the countries that might qualify for such help and the
conditionality attached.
Companies advised to prepare for the long haul
The combined effect of the pandemic and the wideranging
policy response on the future direction of the
European economy, and the fallout for the timber and
associated industries, is impossible to assess at this time.
However, some insight into the possible range of
outcomes can be derived from McKinsey, the global
management consultancy company, who are publishing
free and regularly updated briefings on the implications of
the Covid-19 pandemic for businesses.
See:(https://www.mckinsey.com/business-functions/risk/ourinsights/covid-19-implications-for-business).
The McKinsey briefings set out scenarios for how the
Covid-19 pandemic might develop and the consequences
for the wider global economy. The scenarios are
constantly being updated and revised as more data comes
available. In their briefing published 25 March, McKinsey
was able to consolidate and simplify their analysis into just
two likely scenarios, one which is relatively ¡°optimistic¡±,
the other less so.
The more optimistic ¡®Delayed Recovery¡¯ scenario projects
that new case counts in the Americas and Europe rise until
mid-April, Asian countries peak earlier, and epidemics in
Africa and Oceania are limited. The scenario assumes
successful roll out and implementation of social distancing
and testing practices and that the virus proves to be
seasonal, further limiting its spread.
Even in this scenario, McKinsey expect large-scale
quarantines, travel restrictions, and social-distancing
measures to drive a sharp fall in consumer and business
spending until the end of the second quarter of 2020,
producing a worldwide recession that would continue at
least until the end of the third quarter.
In this scenario, it would take until the fourth quarter of
2020 for European and US economies to see a genuine
recovery and total global GDP this year would fall, but
only slightly. Nevertheless, unemployment levels would
rise sharply, business investment would contract, and
corporate bankruptcies would soar, putting significant
pressure on the banking and financial system.
The other scenario, equally plausible and more
pessimistic, is for ¡°Prolonged Contraction¡± in which the
global economic impact is severe, approaching the global
financial crisis of 2008¨C09. If this scenario plays out,
global GDP is projected to contract significantly in most
major economies in 2020 and recovery would not begin
until the second quarter of 2021.
In the ¡®Prolonged Contraction¡¯ scenario, it is assumed the
epidemic does not peak in the Americas and Europe until
May, as delayed testing and weak adoption of social
distancing stymie the public-health response. Also, the
virus does not prove to be seasonal, leading to a long tail
of cases through the rest of the year.
In this scenario, Africa, Oceania, and some Asian
countries also experience widespread epidemics, though
countries with younger populations experience fewer
deaths in percentage terms.
Even countries that have been successful in controlling the
epidemic (such as China) are forced to keep some publichealth
measures in place to prevent resurgence.
In the case of ¡®Prolonged Contraction¡¯, demand would
suffer as consumers cut spending and the number of
corporate layoffs and bankruptcies in the most affected
sectors rises throughout the rest of this year, feeding a
selfreinforcing
downward spiral. Fiscal and monetary-policy
responses would prove insufficient to break this spiral.
McKinsey suggest that a full-scale banking crisis would be
averted even in the case of ¡®Prolonged Contraction¡¯,
because of banks¡¯ strong capitalization and the
macroprudential supervision now in place, but the
financial system would suffer significant distress.
McKinsey conclude with some hard-nosed guidance to
companies on the best way to respond to the pandemic
emphasising, for example, that ¡°facing up to the
possibility of a deeper, more protracted downturn is
essential, since the options available now, before a
recession sets in, may be more palatable than those
available later¡±.
Companies involved in all sectors are strongly advised to
ensure they have a business continuity plan in place and to
monitor developments closely.
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