Focus: EZ sentiment data, US Fed, new GDP forecast for AT

EZ: Sentiment data for November in Focus

Next week, key sentiment data (PMI and Economic Sentiment Indicator ‘ESI') for the assessment of the Eurozone economy in November will be released. As almost all Eurozone countries have gradually adopted restrictive measures since the beginning of October to curb the spread of COVID-19, sentiment in the services sector already deteriorated in October. In contrast, the mood in industry has continued to improve thanks to the dynamic economic recovery in Asia, where COVID-19 has so far been kept under control.

Sentiment in the services sector could stabilize next week with the November data. This is partly due to the success of the measures taken in previously badly affected countries such as Spain and France, where the 7- day average of new infections has fallen sharply since the beginning of November. This increases the chances of a timely easing of restrictive measures, which would particularly benefit the services sector. In addition, the recent positive news on vaccine developments has significantly increased the likelihood of the pandemic ending in 2021. This could already have a positive impact on the mood in the service sector, which has been hit hardest by the pandemic. On the other hand, industrial sentiment could weaken somewhat in November after the recent highs.

As a result of the curtailment measures implemented in many Eurozone countries since mid-October, we expect a slight decline in GDP in 4Q20. Due to weather conditions and because vaccination of the population will take place only gradually, we expect that restrictive measures will also have a dampening effect on growth in 1Q21. However, from 2Q21 onwards, warmer spring weather combined with the wider use of vaccines and improved testing methods should allow many restrictions to be gradually lifted. This, complemented by substantial fiscal and monetary support measures, should allow for a rapid recovery of the Eurozone economy over the course of 2021.

How will the Fed respond to the increase in new infections and how will it not?

While in November, the ECB clearly reacted to the renewed sharp rise in COVID-19 infections by announcing an additional easing of monetary policy, the Fed remained cautious a week later. Even though the FOMC signaled its willingness to act (as always), the markets were in no way prepared for the possibility of new monetary easing.

At that time, however, the two economic areas were at different stages in the next spread of COVID-19. While in Europe, contagion was rising rapidly in many countries, the situation in the US was much better. Since the last meeting of the FOMC, however, the situation has reversed. While the dynamics of COVID-19 infections in Europe are levelling off, the situation in the US has become much more acute. This makes containment measures in the US more likely, which the FOMC had probably not anticipated in the baseline scenario in November. California, Michigan, New York and Washington are the most recent states to introduce new measures. Other states could follow suit to an extent that could cause further significant damage to the economy, at least until the end of the year.

Will the FOMC react to this deterioration in the environment at the December meeting? There is no indication at present, but the publication of the minutes of the last FOMC meeting next week may provide more information. At the press conference after the meeting, Fed Chairman Powell said that the options for purchases had been discussed. At the moment, it looks as if there will be no further easing of monetary policy, provided that the market continues to not experience any springtime stress. The Fed's current purchases are essentially limited to government bonds and mortgage bonds, which, depending on necessity, are purchased de facto without a concrete time commitment. With regard to the latter, the FOMC could set a minimum duration in order to give markets a timeframe for these support measures and thus influence the markets' outlook. In any case, the markets expect a continued very generous supply of liquidity.

What the Fed will not address in December is the extension of lending facilities that expire at the end of December. The US Treasury Secretary has ‘requested' that five programs (Primary and Secondary Market Corporate Credit Facility, Paycheck Protection Program Liquidity Facility, Municipal Liquidity Facility, Main Street Loan Facility) should expire on December 31, as scheduled. The Ministry of Finance is contributing ‘equity' to these programs, which provide a buffer against possible loan defaults. The timing of this decision is very unfavorable, as the risks are increasing again, due to the sharp rise in COVID infections. At the same time, however, the demand for these programs from the business community was low, as borrowers were able to return to regular financing relatively quickly. For months now, the volume of the programs has been constant.

A termination of these programs would free up considerable funds. Treasury Secretary Mnuchin speaks of USD 450bn, which the US Congress could re-appropriate. Should this lead to an agreement in the US Congress on a new fiscal package, it would even be positive for the economy. The Fed has reacted with displeasure to the Treasury secretary's decision. However, we do not expect any effects on the economy. Only if the crisis were to escalate again, with an impact on lending, would these programs have to be relaunched, which would take time.

According to Mnuchin, other programs designed to support individual sectors of the financial market should be extended by 90 days.

AT: Deeper recession in 2020, due to second lockdown

After a strong slump of -12.5% q/q in 2Q, due to COVID-19 related containment measures, the Austrian economy showed a strong recovery of +11.1% q/q in 3Q (or -14.5% in 2Q and -5.3% in 3Q compared to the previous year). Due to the recent sharp increase in new COVID-19 infections and the recently imposed second lockdown, economic output will continue to decline in 4Q.

In contrast to the lockdown in spring, however, we expect a less pronounced negative effect this time. This is likely to be mainly due to the fact that, this time, the manufacturing sector will continue to operate and national borders will be open for the movement of goods. In the service sector, the catering and hotel sectors will be most affected, as tourism is severely restricted. At the moment, we expect the strict containment measures to remain in force until around mid-December. Our GDP forecast also takes into account the announced government support for the affected sectors. Based on these assumptions, we now expect real GDP to decline by 7.2% this year. For 2021, we expect a recovery of 3.4%.

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