"July shows braking in the recovery of travel and tourism", warns EY / Parthenon

The fourth edition of EY / Parthenon's “Notebook of Notes”, on “The economic crisis of Covid-19” - released this Friday, August 7th - a work elaborated with the supervision and scientific direction of Augusto Mateus, strategic consultant from EY Portugal, traces the analysis of the economic crisis to the fifth month of the pandemic.

"The July data show a slowdown in the recovery of travel and tourism, which contributes to a worsening of the crisis", says the fourth edition of the "Notebook of Notes" of EY / Parthenon, on "The Economic Crisis of Covid-19" , prepared under the supervision and scientific direction of Augusto Mateus, strategic consultant at EY Portugal. In addition - he adds - "the rules of social distance, which are essential to mitigate the pandemic, aggravate all the economic activity of services with a higher density of social interaction or in which mobility plays a determining role", he warns.

“This crisis has been faced with an extended recourse to forms of total or partial suspension of work, where the lay-off mechanism has taken on the central role”, comments this latest edition of the “Caderno de Notas”, referring that, “ in the Portuguese case, this mechanism will have reached a maximum that approached one fifth of the total employment and involved more than one hundred thousand companies ”.

The economic crisis of Covid-19 - in an analysis carried out in the fifth month of the pandemic - allows to identify three central characteristics, namely, that “the production of services was more affected than the production of goods”, that “the constraints to the mobility of people and that the restrictions in social contact and in the forms of human physical interaction penalize work and consumption processes "and that" the lay-off represented an important mechanism for the defense of workers' income and the liquidity of companies ", providing that "The dragging of the current situation of coexistence between economic crisis and pandemic in public health will impact on the rise of the unemployment rate", says EY / Parthenon.

The document considers that “the countries of southern Europe are more affected than those in the north and Portugal has a recession above the average of the euro zone”, adding that the “second wave of Covid-19, in the penultimate quarter of 2020, may push the unemployment rate in Portugal to 17,6% ”, he warns. “Private consumption should converge faster to pre-Covid levels, compared to exports, imports and investment”, “Portugal should be more resilient than Europe in the possibility of attracting FDI” and “reindustrialization, the Framework Multiannual Financial and the European Union Recovery Instrument are key responses to the recovery of the economy and employment ”, concludes the work of EY / Parthenon, coordinated by Augusto Mateus.

In view of the third edition of the “Caderno de Notas”, of June 23 - and released that were, by the main statistical institutes, the first and very preliminary estimates of the evolution of GDP, in volume, in the second quarter of 2020 - it is evident “ the dimension of an unprecedented economic crisis in its quantitative expression of the fall in economic activity and in its qualitative expression of a truly planetary, global economic crisis, ”says the consultancy.

“As we enter the fifth month after the declaration of a pandemic by the World Health Organization (March 11), it is clear that the coexistence between public health crisis and economic and social crisis has proved to be much more demanding than it seemed when the generality of the governments adopted procedures for the progressive lifting of restrictions on confinement, ending the month of April, the one in which the greatest reduction in the mobility of the population and the greatest fall in economic activity was achieved ”, he adds.

If the present crisis has been affecting the production of services more strongly than the production of goods, “it is within the great conglomerate of activities polarized by travel and tourism that this has been most felt”, he says, adding that “in the main economies of southern Europe, this segment represents, in direct, indirect and induced wealth creation, values ​​close to 20%”.

In a scenario in which “the current perspectives for economic evolution remain negative and strongly uncertain, the dragging of a situation like the current one, of coexistence between economic crisis and public health pandemic, will not fail to cause a full alignment between the level of employment and the level of economic activity, that is, a considerable increase in the unemployment rate ”, he says.

"In the case of a second wave of COVID-19 in the penultimate quarter of 2020, the unemployment rate in Portugal could be pushed to 17,6%", admits the work of EY / Parthenon. “This possibility, moreover, will lead to a slower recovery in consumption patterns, which may translate into greater liquidity problems for companies and also increase the risk of instability in the financial system at European level. In this context, there is a greater vulnerability in the countries of the south (Spain, France and Italy) ”, he considers.

“The EC expects that in 2020 the GDP in Portugal will contract by 9,8%, a 3 pp increase compared to the previously projected. This aggravation contributed to the greater difficulty in controlling the pandemic during the phase of deflation, in association with the significant weight of tourism in the economy. The relative increase in the number of Covid-19 cases in Portugal with the beginning of the lack of definition, has affected the recovery of the consumption patterns of the Portuguese and has led to the imposition of travel restrictions by European countries, conditioning the recovery of tourism activity ” , says the same study.

“Consumption will tend to be the macroeconomic variable that will most quickly tend to return to pre-pandemic patterns, as opposed to exports, imports and investment, which should experience a slower recovery. In relation to Private Consumption, it appears that, in addition to the strong contraction seen since March, there was a transfer of consumption between its different components. The most notorious example is the transfer of consumption "outside the home" (catering) to "inside the home" (food trade). Considering the data on electronic payments by residents released by SIBS Analytics (20 June), it can be seen that in the 2nd quarter of 2020, expenses with restaurants fell by 57,8% (-616M euros) compared to the same period, while expenses with food consumption increased by 22,8% (+ 657m euros) ”, says the work coordinated by Augusto Mateus.

“The crisis caused by the pandemic is also manifested by an asymmetry of the dynamics of consumption at the territorial level. While districts more dependent on tourism, such as the Algarve (-39,3%), Lisbon (-37,8%) and Porto (-26,7%) registered more significant drops in consumption, districts with less exposure to tourism and greater weight of public employment, such as Portalegre (-1,7%) and Bragança (-3,6%) registered less pronounced declines ”, compares the work of EY / Parthenon.

The effects of the crisis on Foreign Direct Investment (FDI) “will appear later, but they will feel strongly around the world. Portugal, however, according to the results of the EY Attractiveness Survey 2020, shows greater resilience in maintaining the FDI projects announced in 2019 vis-à-vis Europe (20% will be at risk, against 35% in Europe). The focus on the digital domain and business services explains the lower exposure to the pandemic ”, says the same study.

“The global and global nature of this crisis does not permit partial and individualized solutions. Any national economy will only recover completely in the context of a resilient interdependence fueled by more balanced forms of globalization. Any European economy will only recover completely within the framework of a reinforced European construction with renewed instruments for the joint promotion of cohesion and convergence. In this adverse context and marked by unpredictability and uncertainty, reindustrialization, the Multiannual Financial Framework and the European Union Recovery Instrument appear as key responses to counteract creating and boosting the recovery of the economy and employment ”, the document says.

The present “notebook of notes” was concluded on the day that the main statistical institutes released the first and very preliminary estimates of the evolution of GDP, in volume, in the second quarter of 2020, which, in summary, gave us the values ​​of higher breaks in modern economic history, namely in the European Union (-14,4%), in the Euro Area (-15,0%), in Germany (-11,7%), in Portugal (-16,5% ), Italy (-17,3%), France (-19,0%), Spain (-22,1%) and the USA (-32,9%), also refers to EY / Parthenon.

The work clarifies that “the figures disclosed are sufficiently significant to force a generalized understanding of the true dimension of the crisis that we face, that is, a new, difficult and heavy exception, even though these numbers are well below, in this second quarter of 2020, of the evolution of decisive macroeconomic variables ”. It also states that “the most reliable estimates of GDP growth in the second quarter of 2020 should be available in mid-August. While it is not time to value the discussion of percentage points, it is important to note, however, that the methodology that the statistical institutes follow for the determination of GDP accommodates, well, a concern for assessing the level of production, expenditure and income in a global logic, as they tend to reflect a greater aptitude in the evaluation of tangible variables, strictly quantitative ”, he says.

“The economic and social crisis triggered by Covid-19 presents, within the framework of its profound asymmetries, three central characteristics that must be valued in order to properly interpret the information available on the respective size and configuration. Firstly, it is a crisis that has affected the production of services much more significantly than the production of goods. The most developed modern economies are tertiary economies, that is, economies where the production of agricultural and industrial goods represents less than a fifth of the total ”, he says.

“Covid-19's economic crisis is not, nor will it be, despite its strong expression in the automotive and fashion industries, for example, a predominantly industrial crisis. The deepening economic and social crisis mainly affects, across the board, the vast array of service activities, domestic and international, increasing their potential to destroy wealth and employment and reducing the scope of the resilience mechanisms that, precisely, in previous crises , had been triggered with the turning to service activities with less capital requirements and qualified work ”, he considers.

“The centrality of services in deepening the present crisis, driven by restrictions on mobility and social interaction, on the one hand, and the purification, by focusing on the essentials, of consumption models, on the other hand, also leads to a slower and more dragged on in the recovery of the declines in economic activity caused by the great confinement, above all in a scenario, which is profiling, advances and setbacks in the dynamics of the processes of deflation. The most affected service segment, the large conglomerate of activities polarized by travel and tourism, which, for example, in the main economies of southern Europe represents, in the direct, indirect and induced creation of wealth, values ​​in the vicinity of 20%, constitutes, also, the one where the subjective elements of uncertainty, risk and insecurity are more determinant in the formation of demand trends where the comfort of confidence in the availability and stability of yields in the near future is essential ”, says the work of EY / Parthenon.

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