Via Wolf Street

Europe is about to find out. 128 days with my Mother-in-Law.

By Nick Corbishley, for WOLF STREET:

As market players cling to the hope that a V-shaped economic recovery is still possible in Europe, to match the central-bank engineered rebounds of benchmark indexes such as Germany’s DAX and the Netherlands’ AEX, the reality on the ground continues to get worse for many families and businesses. On Tuesday, the Bank of Italy published the findings of a survey of Italian households on the impact of the lockdown. As you’d expect, most of the findings were pretty bleak:

  • More than half of the respondents said they have suffered a contraction of household income following the measures adopted to contain the epidemic.
  • Fifteen percent of households have lost more than half their income.
  • Some 40% of families are struggling to keep up with their mortgage payments.
  • More than half of the survey’s respondents believe that even when the epidemic is over, they will spend less on travel, holidays, restaurants, cinema and theaters than they did before the crisis.

No V-Shaped Recovery.

For most of these people, there will be no V-shaped recovery. Not only are they spending less money today, they expect to spend less tomorrow. While it’s true that people often say all kinds of stuff in surveys about how they will act in the future and then not stick to it, this particular response chimes with my own experience as well as the accounts I’ve heard from friends and acquaintances in countries as far and wide as Spain (where I live), the UK (where I’m from), Mexico (where my wife is from), France, Argentina and the U.S.

It is also broadly supported by central bank data, which confirms that the Covid-19 outbreak set in motion a synchronized global consumer deleveraging. Even after the lockdowns were lifted, many people are frantically saving for the next rainy day, despite the fact that interest rates have been driven to unprecedented lows.

In the UK, where the Bank of England has slashed the benchmark rate to 0.1%, the lowest on record, there was a £4.6 billion net repayment of consumer debt in May while deposits held by households, non-financial businesses, and financial businesses rose by £52 billion, following large increases in March and April.

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For most people who’ve suffered a big hit to their income during the crisis, saving is not an option. In the UK, over a third of adults have had to eat into their savings to support themselves during the lockdown. They’re also cutting back on their expenses.

I can empathize. As a freelance worker in Barcelona, I’ve lost three of my main clients (out of six) since March, wiping out 30% of my income. My wife is one of the 1.7 million furloughed workers in Spain that are receiving 70% of their pre-crisis income from the government while wondering whether they will have a job to go back to when the furlough program ends, which is scheduled to occur in September. At that point many businesses will have to lay off some or all of their workers. That’s when the real pain will begin.

Putting Off the Pain A Little Longer.

In the Eurozone’s four largest economies (Germany, France, Spain and Italy) and the UK, a combined 45 million workers were registered in furlough programs at the end of May — compared to about 32 million Americans who are claiming unemployment benefits under state and federal programs. In the Eurozone, the furloughed workers are not included in the official unemployment stats, and the jobless rate has barely moved since the pandemic began.

Some politicians and pundits have called for the furlough programs to be extended by a few more months — whatever it takes to put off the pain a little longer — but the OECD last week cautioned that while the furlough schemes have helped to save millions of jobs, at least temporarily, extending them further risks creating, at enormous cost, a whole new generation of government-subsidized zombie companies and zombie jobs.

128 Days With My Mother-in-Law.

In a way, my wife and I are lucky (at least that’s what we tell ourselves most of the time), since my Mexican mother-in-law is also living with us, having arrived in Barcelona, with her usual impeccable timing, just ten days before Spain’s lockdown began. She was supposed to stay with us in our 85 square-meter apartment (915 square feet) for just a month before moving on to a place of her own, but during the lockdown that was impossible. We’ve been sharing the same space now for 128 days — a personal record that keeps growing by the day!

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Aside from the occasional family drama and despite the dystopian backdrop, we’re actually coexisting in relative peace and harmony. And by pooling our resources, we’ve been able to weather the storm financially better than we would have.

Other people have not been so lucky. In our building alone, we are aware of two tenants who have not paid any rent since the crisis began. Both lost their jobs at the start of the lockdown. Because a large chunk of their salaries was paid en negro (under the table), as is common practice in Spain, the money they receive from the government’s furlough program pales in comparison with what they were earning, and is not nearly enough to pay the rent and feed the family.

These are the only two residents of our apartment building we’re on close enough terms with to ask whether they’re keeping up with the rent. There are likely to be others. According to Spain’s Association of Rental Home Landlords (Asval), the total number of rental delinquencies has tripled from 5% to 15% in the past four months. This is putting strain on many small-scale property owners who need this rental income to meet their own expenses, including mortgages on the properties, Asval warns.

Financial Pain Moving Up the Food Chain.

This is a constant feature of the virus crisis. The financial pain keeps spreading up the food chain. When tenants stop paying, landlords are suddenly unable to meet their own financial obligations. In the UK, most retail tenants stopped paying their rent in April after the government announced a moratorium on evictions. This put huge strain on retail landlords, many of whom were already in dire straits. Three months later, mall giant Intu collapsed into bankruptcy after its lenders refused to restructure its debt. One of its biggest rivals, Hammerson, could soon face a similar fate.

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Even in Europe’s richest economy, Germany, many companies are struggling, although the government is doing all it can to keep them alive. According to a new survey by the German Chambers of Commerce, 83% of domestic firms with high international exposure have experienced a collapse in revenues; 15% of the companies surveyed said their revenues had plunged by more than half — coincidentally, the same number of Italian households that said their incomes had collapsed by more than half.

More than half of the firms said they plan to invest less abroad, compared with only 35% in April — again, a similar number to the percentage of Italian households that expect to spend less in the future. This trend is likely to be repeated in many other export-led economies and is yet another sign of the belt tightening taking place across Europe. By Nick Corbishley, for WOLF STREET.

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