European central bank: Watching and worrying

Executive Summary

The European Central Bank’s (ECB) October 29 monetary policy meeting takes place against a worsening economic backdrop. We do not expect a policy change at that meeting, though the ECB will likely offer a more cautious economic assessment. The chance of further easing may be rising; however, it is not yet our base case. If the Eurozone recovery fails to gain sustainable traction, the central bank may feel compelled to ease further during the first half of 2021.

European Central Bank to Stay on Hold, for Now

The European Central Bank’s (ECB) October 29 monetary policy meeting takes place against a more uncertain Eurozone economic backdrop. Eurozone activity staged a solid recovery over the summer, and while the consensus estimate is Q3 GDP grew 9% quarter-over-quarter, there might even be upside risk to that forecast. Of more concern is the outlook for the Eurozone economy in Q4 and beyond. There has been a resurgence in the spread of COVID across the continent, and over the past week, the average daily increase in new cases is nearly 80,000/day. In response, some Eurozone governments have re-instituted restrictions, albeit not as stringent as during the European spring, a factor that could slow the momentum of the recovery. Accordingly, in our view, the risk is for much slower—or even a pause—in Eurozone Q4 GDP growth. Of note, the October services PMI is forecast to fall to 47.0, which would be a second straight month back below the breakeven 50 level.

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