United Kingdom
The economy appeared to rebound in Q3, following a record collapse in GDP in Q2 due to a pandemic-induced fall in domestic demand. GDP rose strongly in July as Covid-19 restrictions were loosened, while industrial production also grew in the same month. However, the labor market remained weak in July and August. Moreover, PMIs for both services and manufacturing dropped in September, indicating a potential slowdown in private sector momentum towards the end of the quarter. This comes amid the recent snap-back of some restrictions due to a second wave of cases. In other news, Chancellor Rishi Sunak scrapped plans for an autumn budget, instead revealing a job support package to replace the current furlough scheme which ends in October: The government will contribute a maximum of 22% of wages for employees who are working fewer than normal hours, in an attempt to stem further job cuts. The economy is set for a sharp downturn this year, as the pandemic inhibits domestic demand. However, fiscal and monetary stimulus should support a rebound in 2021. That said, increased restrictions amid rapidly rising infection rates, rising unemployment and Brexit-related uncertainty all pose downside risks to the outlook. FocusEconomics panelists project GDP to contract 9.9% in 2020, and to expand 6.5% in 2021, which is up 0.2 percentage points from last month’s forecast. • Inflation fell to 0.2% in August, down from 1.0% in July and moving further below the Bank of England’s 2.0% target rate. Going forward, our panelists see inflation remaining substantially below target due to low prices for oil and other commodities, and depressed consumer spending. FocusEconomics panelists forecast inflation to average 0.9% in 2020 and 1.5% in 2021, which is unchanged from last month’s forecast. In September, the BoE kept the Bank Rate at a record low of 0.10% and made no changes to its asset purchase program amid a gradually improving economic panorama. Most panelists see rates unchanged in the short- to medium-term, although Covid-19 and Brexit make the outlook uncertain, and some panelists do see rates being lowered further. FocusEconomics Consensus Forecast panelists see the Bank Rate ending 2020 at 0.10% and 2021 at 0.08%. The pound traded at USD 1.27 per GBP on 25 September, down 3.1% month-on-month as the greenback experienced an uptick in safe-haven demand and spiking Covid-19 cases in the UK weighed on GBP sentiment. Looking ahead, our panelists see the pound appreciating, although this is likely contingent on a smooth Brexit transition. Our panelists project the pound to end 2020 at USD 1.31 per GBP and 2021 at USD 1.37 per GBP.
United States
Economic activity appears to have recovered robustly in Q3, after GDP contracted at the fastest pace on record in Q2 due to a plunge in domestic demand amid Covid-19 containment measures. In August, the unemployment rate dropped 1.8 percentage points from the month prior while non-farm payrolls continued to rise, although they were still down 11.5 million compared to February. Moreover, retail sales continued to grow in August, albeit at the softest pace in four months as additional weekly unemployment benefits for roughly 25 million unemployed people expired at the end of July. Nevertheless, private consumption should have still rebounded firmly in Q3 compared to the previous quarter. That being said, consumer confidence remained downbeat in August, which, coupled with uncertainty over the timing of another coronavirus relief package, should limit retail sales growth ahead. The economy is expected to contract notably this year due to a higher unemployment rate and anemic consumer confidence weighing on private consumption. Next year, GDP should rebound on the back of monetary and fiscal stimulus and as the impact of the pandemic fades. U.S.–China trade tensions are a key downside risk, however. FocusEconomics panelists see GDP contracting 4.7% in 2020 before growing 3.8% in 2021, which is down 0.2 percentage points from last month’s forecast. Inflation increased to 1.3% in August (July: 1.0%). It will likely remain well below 2019’s average for the rest of the year on depressed demand. Next year, inflation is seen rising due to stronger economic activity and vast monetary stimulus. FocusEconomics panelists see inflation averaging 1.1% in 2020 and 1.8% in 2021, which is up 0.1 percentage points from last month’s estimate. At its 15–16 September meeting, the Fed maintained the target range at its effective floor of 0.00%–0.25% and reaffirmed its commitment to using its full range of tools to spur the economy. After the Fed announced a move to more flexible inflation and employment targeting in August, most panelists now see rates unchanged until at least 2023. Our panelists project the federal funds rate to end 2020 at 0.25% and 2021 at 0.25%. The dollar index rose over the past month as concerns over an increase in new Covid-19 cases and the pace of the economic recovery globally increased safe-haven demand. On 25 September, the dollar index traded at 94.6, appreciating 1.7% month-on-month. The evolution of the pandemic at home and abroad should determine the greenback’s performance ahead.
Euro Area
Lockdowns struck an unprecedented blow to the economy in Q2, with domestic demand tumbling amid frozen business and household activity, and with the external sector also taking a hit. Available indicators for Q3 point to an underwhelming recovery: Industrial production and retail sales cooled, exports shrank and the unemployment rate rose again in July. Moreover, both business and consumer sentiment remained downbeat in August, while the manufacturing sector lost ground in August−September following July’s spike. Additionally, outbreaks of the virus in big players France and Spain threaten the regional recovery, while S&P Global Ratings warned that European banks have increased their exposure to sovereign debt, which could result in higher “doom loop” risks. On the political front, EU finance ministers delayed any debate over the timing of the reimposition of budgetary restrictions in a bid to spur the recovery. The economy will shrink at the fastest pace on record this year as lockdowns to contain the spread of Covid-19 lead to business closures, higher unemployment, income losses and elevated uncertainty. In 2021, the economy is expected to rebound and recover some of its lost output. Further waves of infections, high levels of public debt and trade tensions pose downside risks. The economy is seen contracting 8.1% in 2020. In 2021, GDP is seen increasing 5.5%, which is down 0.1 percentage points from last month’s forecast. Harmonized consumer prices fell 0.2% in annual terms in August, swinging from July’s 0.4% increase. Inflation thus moved further below the European Central Bank’s target rate of near, but under, 2.0%. Inflation will decelerate this year compared to 2019 on the back of low oil prices and falling GDP, before accelerating in 2021 on recovering activity. Our panel sees inflation averaging 0.3% in 2020, before picking up to 1.0% in 2021. On 10 September, the European Central Bank (ECB) reaffirmed its quantitative easing program and maintained rates unchanged at all-time lows. Moreover, ECB President Christine Lagarde announced that the Governing Council will take into account the impact of future movements of the exchange rate on the inflation outlook. The monetary stance is set to remain ultra-loose ahead. Our panelists project the refinancing rate to end both 2020 and 2021 at 0.00%. The euro lost some ground against the U.S. dollar over the past month. On 25 September, the currency ended the day at USD 1.16 per EUR, down 1.7% from the same day in August. Going forward, the euro is seen hovering around current levels, although new waves of infections could put downside pressure on the common currency. Our panel sees the euro ending 2020 at USD 1.19 per EUR and 2021 at USD 1.21 per EUR.
Lockdowns struck an unprecedented blow to the economy in Q2, with domestic demand tumbling amid frozen business and household activity, and with the external sector also taking a hit. Available indicators for Q3 point to an underwhelming recovery: Industrial production and retail sales cooled, exports shrank and the unemployment rate rose again in July. Moreover, both business and consumer sentiment remained downbeat in August, while the manufacturing sector lost ground in August−September following July’s spike. Additionally, outbreaks of the virus in big players France and Spain threaten the regional recovery, while S&P Global Ratings warned that European banks have increased their exposure to sovereign debt, which could result in higher “doom loop” risks. On the political front, EU finance ministers delayed any debate over the timing of the reimposition of budgetary restrictions in a bid to spur the recovery. The economy will shrink at the fastest pace on record this year as lockdowns to contain the spread of Covid-19 lead to business closures, higher unemployment, income losses and elevated uncertainty. In 2021, the economy is expected to rebound and recover some of its lost output. Further waves of infections, high levels of public debt and trade tensions pose downside risks. The economy is seen contracting 8.1% in 2020. In 2021, GDP is seen increasing 5.5%, which is down 0.1 percentage points from last month’s forecast. Harmonized consumer prices fell 0.2% in annual terms in August, swinging from July’s 0.4% increase. Inflation thus moved further below the European Central Bank’s target rate of near, but under, 2.0%. Inflation will decelerate this year compared to 2019 on the back of low oil prices and falling GDP, before accelerating in 2021 on recovering activity. Our panel sees inflation averaging 0.3% in 2020, before picking up to 1.0% in 2021. On 10 September, the European Central Bank (ECB) reaffirmed its quantitative easing program and maintained rates unchanged at all-time lows. Moreover, ECB President Christine Lagarde announced that the Governing Council will take into account the impact of future movements of the exchange rate on the inflation outlook. The monetary stance is set to remain ultra-loose ahead. Our panelists project the refinancing rate to end both 2020 and 2021 at 0.00%. The euro lost some ground against the U.S. dollar over the past month. On 25 September, the currency ended the day at USD 1.16 per EUR, down 1.7% from the same day in August. Going forward, the euro is seen hovering around current levels, although new waves of infections could put downside pressure on the common currency. Our panel sees the euro ending 2020 at USD 1.19 per EUR and 2021 at USD 1.21 per EUR.
Tuesday September 29, 2020
