European Fixed Income: Coming Out of Crisis

As European economies slowly start to come out of coronavirus lockdowns, it could be some time before growth returns to pre-crisis levels, according to David Zahn, our Head of European Fixed Income. He says the crisis has been another test for the European Union as the coronavirus has affected some countries moreso than others. But he sees this as perhaps the best time in years to invest in European fixed income.

There’s no doubt COVID-19 has been devastating to the European economy, with gross domestic product (GDP) in the euro area contracting 3.8% in the first quarter in Europe.1 Given the period only included a couple weeks of shutdowns, we saw quite a big impact in a short period of time. We would anticipate GDP is likely to shrink further in the second quarter, but then hopefully we will see growth rebound a bit in the third and fourth quarters. For the year as a whole, we could see European GDP down 10% or more.2

Disparate Impacts, Disparate Needs

COVID-19 has impacted countries in Europe differently. As such, individual needs have differed, as have local government responses to the crisis. In our view, the European Union’s (EU’s) response so far has been weak; policymakers are still debating how much stimulus is needed and in what form, while individual countries have already taken actions. We are seeing almost a “Balkanization” of Europe, in that some countries have dealt with the virus more effectively, have suffered less impact from it, and thus have been able to reopen their economies earlier than others. Italy and Spain are not allowing movement in and out of the country, for example, but Lithuania, Estonia and Latvia are allowing movement amongst them as a block. So, we will see certain country groupings where slow movement of trade and people is allowed.

Tourism is vital for many European economies, so a lack of travel during the summer season ahead is likely to have longer-term impacts on certain countries more than others. For example, travel and tourism represent roughly 15% of Spain’s GDP,3 so a prolonged drop off in travel is likely to negatively impact Spain more than some other countries.

There has been some fiscal stimulus to tide people over while they are at home, but in our view, additional stimulus will be needed as countries come out of lockdowns to get economies moving. We are seeing early signs of progress, but there’s also human psychology to deal with—what will make people feel safe to come back out of their homes, travel and spend?