ECB President Lagarde recently pointed out that there is a risk that the economic recovery of the euro area could lose momentum due to increasing new infections. So far, the ECB's baseline scenario included a slowdown in the euro area economy in 4Q and recovery next year. The assumption behind this was temporary outbreaks of the virus (COVID-19) and then temporary resurgences, as it is not unusual for a pandemic to develop in waves. Given the current rapid increase in new infections and stronger local containment measures, uncertainty about the extent of the recovery has increased. The recovery will depend on how the pandemic, and the consumption behavior of households, or the investment behavior of companies, develop further.
The central bank will monitor all data and indicators very closely in the coming weeks. In December, new ECB staff projections will be published and the outlook for 2021 will also be relevant for further central bank policy. The ECB currently assumes that the shock of the pandemic to the economy will be temporary and should be largely gone by 2022. While interest rate cuts usually have longer-term effects, the PEPP (pandemic emergency purchase program) aims to provide temporary support by returning inflation to its pre-crisis path. The PEPP should therefore remain the preferred instrument. If the ECB concludes in the coming weeks that the momentum of the recovery is significantly weaker than expected, it could react by extending the PEPP. At next week's central bank meeting, we do not yet expect a concrete announcement on the expansion of the PEPP, but there is some risk of this happening. Alternatively, the ECB could confirm its readiness to take further steps (extension of the PEPP) should this become necessary.
EZ: 3Q GDP data and COVID-19 in focus
A first flash estimate of Eurozone GDP growth for 3Q is to be published next week (October 30). Based on the rebound of the economy, we expect substantial q/q growth of around 9%. After a particularly severe GDP slump in Spain, France and Italy in 2Q, we expect these countries to show above- average growth in 3Q. Looking at 2020 as a whole, however, we expect a sharper GDP decline in Spain, Italy and France than in Germany. For the Eurozone, we expect GDP to fall by 7.6% in 2020. In addition, Eurostat will release a flash estimate for inflation in October, which is expected to remain unchanged at -0.3% y/y, weighed down by energy prices and core inflation.
At present, however, the focus is on the increasing numbers of new infections with COVID-19, because the restriction measures required as a result (which primarily affect the hospitality and service sectors) represent a short-term downward risk for the economy of the Eurozone in the current 4Q. As a result, the costs of the crisis for the states are rising, because affected companies and their employees are once again increasingly dependent on state aid. However, the aid funds should dampen any possible economic damage. In the medium term, we expect the gradual recovery of the Eurozone to continue. This is partly because the incidence of infection in Asia is under control, which means that, unlike in the spring, there is currently no danger of an interruption in global value chains. Therefore, a sharp fall in the Eurozone's industrial production such as that seen in spring should not be repeated. On the other hand, comprehensive stimulus measures (e.g. EU recovery plan) should provide substantial support to Eurozone growth from 2021 onwards.
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