Five Recessions: Each Different, But All With Something in Common
Since the mid-1970s, the European economy has suffered five recessions: (1) A property and financial collapse in 1973-75, (2) A shallower slump in 1992-93; (3) A deeper and more widespread downturn in 2008-09 due to the Global Financial Crisis; (4) A sovereign debt crisis in 2011-13 and (5) The Covid-led recession of 2020-21.
Each cycle was different, yet all shared common themes. In each cycle, the banking sector suffered significant credit losses, albeit in the latter these proved artificial due to new IFRS 9 accounting standards. Helped by substantial fiscal support, including extensive furlough measures, banks have subsequently taken large write-backs in 2021-22 and many are still holding large overlay provisions on their balance-sheets.
In almost all of the cases above, the post-recession corporate strategy was framed in terms of avoiding the most recent mistake, be it reducing property exposure, structured credit exposure and/or peripheral sovereign debt exposure. The 2008-09 downturn also led to a wide ranging re-appraisal by global regulators, which led to the introduction of revised capital requirements, new liquidity requirements, greater focus on lending limits, and the undertaking of regular bank stress tests.
- The source of the property and secondary market banking collapse of the mid-1970s was a combination of an unsustainable economic boom and an external economic shock. The first oil shock (in which oil prices tripled), subsequent recession and the puncturing of an asset price bubble (especially in property) severely damaged credit quality across Europe. During this period, Euro Area GDP declined by 2.5% while the unemployment rate rose from 2.6% to 3.3%.
- A slowdown in exports, a sharp increase in oil prices due to the Gulf war, the aftermath of Black Wednesday (UK withdrawing from the European Exchange Rate Mechanism) and a severe banking crisis in the Scandinavian countries following the liberalization of the financial sector and rapid expansion of credit led to a widespread but shallower economic slowdown in the region. Euro Area GDP declined by 0.2% while the unemployment rate rose from 9.0% to 10.8%.
- The worst economic crisis since the Great Depression saw the collapse of the US housing market have a cascading effect on the global economy, especially on the Euro Area. Real GDP fell 5.7% from its peak in 1Q08 to its trough in 2Q09, while the unemployment rate rose from 7.4% in Mar-08 to 10.3% in Mar-10.
- European sovereign debt crisis started with the collapse of the banking system in Iceland and then spread to other European countries such as Portugal, Italy, Ireland, Greece and Spain. During this period, the Euro Area GDP declined by 1.7% while the unemployment rate rose from 10.7% to 12.2%.
Absolute Earnings Trends During the Recessions
In the Euro Area’s five major recessions since 1970s, banks’ trailing earnings declined by up to 66% yoy and dividends were cut by up to 62% yoy:
- 1974-75: reported earnings declined-31% yoy by Sep 1974 and dividends were cut -4% yoy by May 1976.
- 1993: earnings declined and dividends were cut -22% yoy by August 1993.
- 2008-09: earnings declined -66% yoy at end-July 2009 and dividends were cut -62% yoy by September 2009.
- 2011-13: earnings declined -32% yoy by March 2013 and dividends were cut -24% yoy by July 2012.
- 2020-21: earnings declined and dividends were cut -52% and -57% yoy, respectively, by end-December 2020.
For more information on this subject, please see European Banks
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