Eurozone Output Gaps and the COVID-19 Shock
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DOI: 10.1007/s10272-020-0918-9
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Robin Brooks and Jonathan Fortun*
Eurozone Output Gaps and the COVID-19 Shock The eurozone was marked by economic divergence in the decade before the COVID-19 shock, something that © The Author(s) 2020. Open Access: This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (https://creativecommons.org/licenses/by/4.0/). Open Access funding provided by ZBW – Leibniz Information Centre for Economics. *
The authors wrote this article in a personal capacity. The views and opinions expressed herein are their own and do not necessarily reflect the official policy or position of the Institute of International Finance or any other organisation, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the authors.
Robin Brooks, Institute of International Finance, Washington, DC, USA. Jonathan Fortun, Institute of International Finance, Washington, DC, USA.
ZBW – Leibniz Information Centre for Economics
was a starting point for our Campaign against Nonsense Output Gaps (CANOO), which we unveiled in Brooks and Fortun (2019a) over a year ago. In the years leading up to the pandemic, countries in the euro core had recovered quickly from the global financial crisis in 2008/9, while the periphery suffered stagnant and intermittent growth, leaving GDP in some cases well below pre-crisis levels. One reason for this divergence can be found in financial conditions, which tightened substantially for countries like Italy and Spain during the sovereign debt crisis in 2011/12. That tightening in financial conditions made a uniform recovery across the eurozone difficult and some echoes of this can be found in financial markets today. Concerted ECB action has prevented real yields on the euro periphery from rising materially, but it is still the case that real Italian bond yields exceed those in the euro core. As a result, the potential for continued economic divergence within the eurozone exists, which may also exacerbate deflation risk for the region overall.
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Figure 1 Real GDP levels
Figure 2 Real interest rates
index, Q1 2008 = 100
10-year real yields, in %
125
US
120 115
7 6 5
110
Spain
4
105 100
Italy
Germany
95
Spain
90 85
3
Italy
2 1 0
80
-1
75 70 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
US Germany -2 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Note: Last data point is Q2 2020.
Note: Nominal yields minus inflation breakevens.
Sources: Haver Analytics and Bloomberg.
Sources: Haver Analytics and Bloomberg.
Figure 3 Real GDP and potential GDP estimates for Spain
Figure 4 Real GDP and potential GDP estimates for Italy
index, Q1 2008 = 100
index, Q1 2008 = 100
110
110
100
100
90
90
Actual GDP Potential GDP (IMF) Potential GDP (EC) Potential GDP (OECD)
80
80
70 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Actual GDP Potential GDP (IMF) Potential GDP (EC) Potential GDP (OECD)
70 2000 2002
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