Covid-19 crisis: domino effect

Th e ongoing COVID-19 crisis will clearly have a pronounced negative impact on the economic growth outlook. Natixis expects Eurozo n e GDP to shrink by 8.8% in 2020 ( declines of 10.5% in household consumption and 10.6% in GFCF) . A recovery is expected i n 2021, with a 6.9% rebound in GDP at the level of the Eurozone. As regards the upcoming publications of H1-20 corporate earnings, the direct effect s of this crisis will also be very much in evidence, save for a handful of sectors that have proved very resilient ( the Telecoms sector being a case in point). There will be no escaping the indirect effects and domino effects, which will be of many kinds and emerge progressively, not confined therefore to the short-term liquidity risk for large European issuers analysed back in April (see What of the liquidity of European corporates? ). At this stage, we see the health crisis inflicting collateral damages in two other areas , being: ( i )  significant asset impairment losses (notably goodwill) that will weaken shareholders’ funds, in turn leading t o an increase in gearing ; and (ii ) a deepening of pension defici ts , leading therefore to an increase in adjusted leverage ratios , compounding the effect of the decrease in EBITDA. We address this last point proceeding from what are extremely conservative working assumptions f or 2020, with overall downward corrections this year of 25% for the equity market, 5% for the real estate market and 2% for the bond market .