Does COVID-19 threaten the profitability of European businesses in 2021?

Crédito y Caución forecasts a 4.3% drop in world GDP in 2020; meanwhile, the negative impact of COVID-19 is greater than that of the financial crisis of 2008/09

AFP/PIERRE-PHILIPPE MARCOU  -   Credit and Surety economists forecast a 4.3% decline in global GDP by 2020

Credit and Surety economists predict a 4.3% decline in global GDP by 2020. This implies that the negative impact of COVID-19 will be greater than that of the 2008/09 financial crisis. The current growth forecasts are subject to downside risks, as many countries are tightening quarantine measures to deal with a resurgence of infections. Crédito y Caución expects insolvencies to accelerate. While the economic impact of the 2020 pandemic has been severe and accelerating, the results of our latest Payment Practices Barometer for Europe show a region that is being battered, but not beaten, by the virus. Despite this, the pandemic has plunged the euro area into a recession and businesses may need to take further public action next year.

All countries in the region reported an increase in non-performing loans and an extension of the average collection period compared to pre-pandemic levels. The United Kingdom and the Netherlands recorded year-on-year increases in arrears of 81 per cent and 75 per cent respectively. Eastern Europe recorded an average increase of 88%. A significant percentage of companies register a negative impact on cash flow and revenue, especially in Bulgaria and Slovakia. In response to the economic downturn, the study identifies clear new trends in changing business payment practices. Many suppliers have increased their lead times in an attempt to increase their competitiveness and boost sales. However, a considerable proportion reported that they provided this credit to support their customers with short-term financing.

AFP/GABRIEL BOUYS -  World trade is expected to fall by 15% this year

Despite the dramatic increase in late payments and the fact that a considerable number of firms are experiencing liquidity problems, business confidence is buoyant. Although many countries are now entering a second lockdown, a considerable number of firms are optimistic about the outlook for 2021. Much of this apparent business confidence has been driven by public support. Although they differ in approach and scope, many governments in the countries studied have launched business support programmes. The continuity of these policies will be vital for many enterprises in the coming year. The environment for insolvency is likely to worsen. The travel, tourism and hospitality sectors are expected to be the most affected. However, as with the virus itself, there is considerable uncertainty. Much will depend on the evolution of the virus and the effectiveness of any possible vaccines. In the meantime, businesses plan to use a range of credit management techniques to protect their cash flow.

"World trade is expected to fall by 15% this year. Without exception, all countries surveyed in Europe report an increase in arrears, corresponding to an average increase of two thirds over pre-pandemic figures across the region. For several years, the global and domestic economies will have to cope with the effects of this crisis, which is likely to have a substantial impact on business insolvency. However, the results of our Europe Barometer reveal that companies across the region are reacting strongly to the difficult economic conditions and strategically protecting their receivables from the risk of insolvency. A significant proportion of companies report that they have used credit insurance during the pandemic and intend to continue to do so next year. This is a clear message that companies are standing up for themselves, building business relationships where possible. Looking ahead to 2021, it is encouraging to see how many businesses remain optimistic about the future," said Atradius' Chief Market Officer, Andreas Tesch. 

Fieldwork for the Payment Practices Barometer disseminated by Crédito y Caución was carried out during the first wave of the pandemic among companies in thirteen countries in Western and Eastern Europe. The results were compared with the 2019 survey to provide clear trends in the impact of COVID-19 on payment practices.