2020 OPERATING AND FINANCIAL REVIEW
Business activity and information on the Crédit Agricole Assurances Group
explicitly allows the inflation target to be exceeded after periods in
which inflation has been consistently below 2%. After its December
meeting, the Federal Reserve made it clear that it would maintain
an accommodative stance and its key rates at zero for an extended
period as evidenced by the ‘dot plot’, in which the median projection
of members of the FOMC shows unchanged rates until at least
2023. While feeling comfortable with the current set up, the Fed has
said it was ready to do more (more bond purchases and/or maturity
extensions) if necessary.
wave of the pandemic on the short-term scenario and the high
uncertainties about growth (for which it revised the 2021 forecast
downwards from 5% to 3.9%), the ECB sent a very clear signal of
substantial and, above all, lasting presence; it renewed its incentive
to lend to banks and its commitment to limit pressure on the risk
premiums of vulnerable sovereigns: recalibration of the third series
of targeted longer-term refinancing operations (TLTRO III, extension
until June 2022 of the period during which very favourable conditions
adopted in terms of interest rates(2) and easing of collateral apply),
three additional operations planned for 2021 (June, September,
December), increase in the total amount that the counterparties will
be authorised to borrow during TLTRO III, four additional refinancing
operations (PELTRO, from March to December 2021 for a period of
one year), additional budget of €500 billion dedicated to the PEPP
(a total of €1,850 billion), extension of the horizon for net purchases
to the end of March 2022, reinvestment of principal repayment of
maturing securities extended at least until the end of 2023.
The US budgetary response was also rapid (March) and
massive, in the form of a support plan known as the
Coronavirus Aid, Relief, and Economic Security (CARES) Act
(totalling nearly $2,200 billion (i.e.10% of GDP) aimed at providing
financial assistance or relief to households and businesses, but also
to hospitals and states. The flagship measures included the direct
stimulus payment to low and moderate income households, an
unemployment insurance assistance plan (authorising the extension
of unemployment benefits which normally fall under the competence
of the states), financial support to SMEs ($350 billion), loans to
large corporates, to states and local governments ($500 billion), the
release of loans to hospitals ($150 billion). An additional budget plan
($484 billion i.e. just over 2% of GDP), aimed at strengthening the
CARES Act of March and “lengthening” the loan program for SMEs,
was adopted in April.
The Eurozone’s fiscal policy also quickly took an expansionary
turn with national measures (support for the healthcare system,
businesses and employment, public guarantees on new business
loans). By easing constraints on national policies through the
suspension of budgetary rules, the European Commission enabled
the countries to respond immediately to the crisis. Faced with
such diverse national latitudes that posed the risk of a detrimental
fragmentation to the market and to the single currency, the pooling
of resources was essential. The existing funds were first mobilised(3).
As the scale of the crisis became clear, new pooled resources
financed by debt emerged: the SURE fund (support to mitigate
unemployment risks, €100 billion), investment guarantees by the
EIB (€200 billion), a proposal from the European Commission
in favour of a recovery and reconstruction support fund,
redistributing in favour of the poorest countries and those
most affected by the crisis: the Recovery Fund (i.e. €750 billion
raised by bond issue guaranteed by the EU budget).
In 2020(1), the US budget deficit therefore widened by nearly 10 points
to 14.9% of GDP, while the debt grew by +20 percentage points
to reach 100% of GDP. Activity nonetheless fluctuated throughout
the year. After a decline of -1.3% in the first quarter (non-annualised
quarterly change), the decline in GDP in the second quarter was
violent (-9%) but followed by a more sustained rebound than
expected (+7.5% in the third quarter). Owing to the resurgence of
the pandemic, the improvement in the labour market came to a halt
in December (after peaking at 14.8% in May, the unemployment rate
reached 6.7% against 3.5% before the crisis). In the fourth quarter,
economic activity grew only +1%. Despite massive monetary and
budgetary support, the recession in the end stood at -3.5%
(-2.5% in 2009); GDP was 2.5% below its pre-crisis level (end
of 2019) and inflation reached 1.4% at end December.
4
In 2020, the boost to the economy provided by fiscal policy was
slightly less than 4 percentage points of GDP on average in the
Eurozone. Coupled with the cyclical deterioration of the budget
balance (4 percentage points of GDP), the public deficit widened
by almost 9.3% on average in the Eurozone and led to a sharp
increase in public debt (almost 18 points on average to reach just
over 104% of GDP). Despite monetary and fiscal arrangements, the
economy nonetheless evolved with the pandemic and the mobility
restriction measures it imposed. After an already substantial decline
in the first quarter (-3.7% quarter-on-quarter), GDP fell by -11.7%
in the second quarter before recording a spectacular rebound that
was more robust than expected (+12.5%). In the last quarter, the
decline was less severe than expected (-0.7%). While inflation fell
back (-0.3%, year-on-year in December; 0.3% on average),
the recession thus reached 6.8% in 2020 (compared to -4.5%
in 2009), leaving GDP down -5.1% on its level at end 2019 and
showing significant differences between the large Eurozone
countries. For example, in Germany, after almost zero growth in the
fourth quarter, GDP recorded an average contraction of 5.3% over
2020, which remains “limited” notably in view of the financial crisis of
2009 (a -5.7% decline).
In the Eurozone, from March onwards, the ECB deployed
aggressive accommodative measures which it then adapted
to prevent any undesirable tightening of financial conditions:
increase in Quantitative Easing (additional envelope of €120 billion),
launch of
a new temporary purchasing program (Pandemic
Emergency Purchase Program or PEPP of €750 billion, initially until
the end of 2020, purchases not constrained by the limit of holding
no more than 33% of any one bond or issuer, which makes for
easier compliance with the capital distribution key), introduction
of transitional Long Term Refinancing Operations (LTRO) until
June 2020 (with more favourable conditions as well as less stringent
rules for collateral), easing of the TLTRO III conditions, new long-
term refinancing operations Pandemic Emergency Longer-Term
Operations (PELTRO) and, lastly, measures to alleviate the solvency
and liquidity constraints on the banking sector. At the end of
December, faced with the more severe impact of the second
(1) 2020 fiscal year ended in September.
(2) 50 basis points (bp) below the refinancing rate for all outstandings and 50 bp below the deposit rate for any net outstandings equal to the level of outstandings granted
between October 2020 and December 2021. The precondition for benefiting from this strong incentive to lend is therefore clear: the existing support must not be reduced.
(3) Reorientation of unused cohesion funds from the EU budget in the amount of €37 billion, guarantees to SMEs provided by the European Investment Bank (EIB), use of
funds still available from the European Stability Mechanism (ESM) in the amount of €240 billion (or 2% of the area’s GDP).
CRÉDIT AGRICOLE ASSURANCES S.A. 2020 Universal Registration Document
99
