As pandemic containment measures are relaxed and economic activity begins to return, Europe’s exporters face a long road to recovery. Eleanor Wragg reports.
Since Covid-19 hit Europe in March, taking the region’s share of the global total of deaths from 1% to 72% in a single month, the pandemic has exacted heavy tolls on its exporters. Containment measures such as business shutdowns, factory closures and movement restrictions, as well as dramatically reduced demand in Europe’s key export markets, dragged extra-EU exports of goods down by 12.4% in the first half of the year – an unimaginable decline just a few months prior.
Although activity is now slowly picking up as lockdowns lift around the world, the recovery path for Europe’s exporters remains uneven, with many facing an uncertain future.
Barely a single exporting sector has been spared from the pandemic’s devastation. In Italy, the wine sector recorded a decline in exports for the first time in 30 years, with a decrease of 4% according to figures collated by agricultural association Coldiretti for the first five months of this year. This was driven largely by a 44% decrease in exports to China, followed by a 12% drop in sales to the UK, as restrictions on daily life saw restaurants, bars and pubs shuttered.
In France, the aviation sector, which accounts for fully 12% of the country’s exports, entered an official state of emergency as airlines pushed back deliveries and cancelled orders after global passenger flights dropped by almost four-fifths in the first half of the year. To try and stem the damage, the French government has introduced a €15bn rescue package, part of which will go towards bolstering its export credit guarantee scheme in the hopes of supporting aircraft manufacturers such as Airbus and Dassault as well as aerospace component suppliers Safran and Thales.
Meanwhile, even those sectors that looked to have staged a recovery have found themselves at the mercy of the vagaries of the current Covid-afflicted trading landscape. After the European catering industry’s demand for its fresh farmed salmon exports plummeted, Norway found willing buyers in China, where it already holds a 45% market share. In April, it sent 3,141 metric tonnes of the fish to the Asian nation, almost double the quantity compared to the same month of 2019, according to Norwegian Seafood Council (NSC) figures. But this boom was short-lived. In June, the discovery of Covid-19 on boards used for cutting the imported fish at the Xinfadi food market in Beijing led to an immediate halt in purchases, and despite subsequent investigations finding that the product wasn’t the source of the contamination, there is no sign of a return to growth.
The latest NSC figures now show Norway’s salmon exports to China down 76% in the first week of July versus the same period last year.
There are, however, some bright spots. In Germany, while total exports declined by a whopping 23% between March and May this year, the pharmaceutical sector booked an increase of 14.3%, according to official figures, with markets including the US, the Netherlands and Switzerland the top buyers for its products. Also doing well out of pandemic-related trade was the chemicals sector, as surging biocide and disinfectant demand drove EU-wide exports up by 4% in March alone.
Can Germany export its way out of this crisis?
As the EU’s manufacturing powerhouse, Germany’s outsized export dependence saw it record its worst-ever year-on-year GDP drop in Q2 this year as the usual buyers of its goods languished under lockdowns.
“During the financial crisis, Asian countries played an important role in the swift recovery of German industry. Today, there is no saviour in sight to boost external demand,” says Carsten Brzeski, chief economist for the eurozone and global head of macro at ING, in a recent report.
However, German business leaders – not a group inclined to undue expressions of positivity – appear to be increasingly hopeful about their prospects. The Ifo Business Climate Index, a leading indicator for economic activity in the country, has clambered from an all-time low of 74.3 in April to a markedly brighter 92.6 in August as companies’ assessments of their current situation jumped higher.
Much of the optimism stems from China, where new car sales have rebounded to near pre-pandemic levels after a drop of 79% in February, providing some much-needed cheer to German carmakers, for whom the Asian country represents their most important market.
Werner Schmidt, global head of structured trade and export finance at Deutsche Bank, tells GTR that sentiment appears to be improving across the board: “Quite frankly, in March, April and May, I was relatively pessimistic in terms of outlook. However, recently, the deal pipeline has been very active again, which is a reflection of increased confidence among our clients.
The order book is improving here and there, so that gives me some optimism that the year overall might be better than initially expected.”
He points to “bold moves” from the German government in supporting the economy as being a vital source support, but highlights that not everyone is out of the woods yet. “We still see supply chain issues with our clients and travel restrictions continue to make it challenging for them to execute projects,” he says. “There are a lot of challenges out there, but it doesn’t look as bleak as we were afraid of for a while.”
The main areas of concern, Schmidt says, are in the transportation sectors, including cruise ships and aviation. “Covid has accelerated underlying trends, so industries that are in transition such as automotive are also being negatively affected,” he explains. “The expectation is that export finance will play a significant role in the recovery because it’s reliable through the cycle and it gives a lot of stability both to balance sheets and also to countries from a sovereign risk perspective.” However, he believes that true stability will come from a collaborative approach from all financiers in the ecosystem. “What that means from our perspective is that you have to look at more burden sharing, such as bringing in more development finance institutions where commercial lending – such as down payment financing – has become more challenging.”
Some signs of growth in the UK
Already struggling with the implications of a potential no-deal Brexit at the end of this year, the UK’s exporters had a tough ride over the first few months of 2020.
Q2 figures for UK manufacturing exports from the Lloyds Bank International Trade Index showed a record decline, with basic metals and automotive exports hit hardest thanks to the double whammy of the impact of coronavirus on international supply chains and falling overseas demand for British goods and services. It wasn’t all doom and gloom, though: the index shows that exports of chemicals and plastics held somewhat firmer, in part due to forward purchasing by overseas buyers in expectation of delivery delays.
By the end of June, early signs of a recovery in international demand started to become apparent in trade in British consumer goods, with a 50.7 reading on the Lloyds index for clothing and textiles and a 56.7 reading for other manufacturing goods such as sports and leisure equipment.
“We see small signs of recovery as early as May and into June. While it is too early to talk about the trajectory of recovery, it is encouraging to see enhanced external demand, signs that China’s economy is stabilising, and some UK consumer goods’ export growth,” says Gwynne Master, global head of trade for Lloyds Bank Global Transaction Banking, adding: “Government schemes and finance options continue to be made readily available, which will help UK exporters continue to trade, to position for a return to normality to international trade, and to prepare now for potential future disruption.”
Optimism in Italy
As the first European country to be hit by the pandemic, Italy’s nationwide lockdown, implemented on March 9, brought its economy to a halt several weeks before many of its neighbours. At that time, the focus of all stakeholders in trade, from clients to banks and export credit agencies (ECAs), was primarily on liquidity, with large scale investments delayed, according to Francesca Beomonte, global head of structured trade and export finance at UniCredit. “We’re now seeing transactions being reactivated and currently under execution,” she tells GTR, adding that a number of large deals, particularly in the oil and gas sector, are under consideration and may materialise in the coming year.
While she notes that all industries related to tourism and transport have been massively impacted by Covid, she says that other sectors, such as telecommunications, medical equipment and infrastructure, are in some cases developing better than before.
As a result, she sees export finance being increasingly used as a viable solution to finance investments in the coming months. “Some borrowers have started to approach export finance as a competitive alternative to their usual sources, above all looking for funding diversification,” she says. “Looking ahead, new export finance products, such as untied and multi-tied will become more relevant, and we’re certainly seeing more creativity in the market – largely through ECAs and banks jointly developing new products.”
Recovery in sight
While the success of European countries in flattening the Covid curve has varied, the flattening of trade has been universal. And it isn’t just the virus that Europe’s exporters need to worry about: “We expect weak growth in the eurozone, the potential threat of a no-deal Brexit on New Year’s Eve, more trade war pressures and a subdued Asian recovery,” says Julien Manceaux, senior economist for France, Belgium and Switzerland at ING in a note.
However, there are signs that a recovery – albeit a mechanical one – is in sight.
The most notable indicator is found in the IHS Markit eurozone manufacturing purchase managers’ index (PMI). August marked its second consecutive month of expansion as both output and new orders rose at marked rates, with Germany and Italy registering some of the strongest increases in output.
For Chris Williamson, chief business economist at IHS Markit, these figures provide “encouraging evidence” that production will rebound sharply in the third quarter after the collapse seen at the height of the pandemic in the second quarter. However, he warns against too much enthusiasm: “Caution is warranted in assessing the likely production trend, as so far it would have been surprising to have seen anything other than a rebound in output and sentiment,” he says.
With so much uncertainty still ahead, it is too early to predict the path Europe’s exports will take in the near term, and while there is some reason for optimism, the next few months’ data will be all-important in assessing the sustainability of the upturn and the amount of additional support that will be required from banks and governments alike.