The global economy accelerated during the summer months after the virtual halt of economic activity in Q2/2020. During the third quarter, consumer sentiment brightened, household spending increased, and Purchasing Manager Indices (PMIs) in the manufacturing and services sector rose above 50 indicating the economic expansion should continue in the coming months. The beginning of the fourth quarter seems to be going well although October flare-ups in COVID-19 cases in Europe and the US are beginning to influence economic sentiment.
Meanwhile, investors around the globe waited in suspense for the outcome of the US presidential election. Markets seem quite content with the result and seeing some positive consequences of a Democratic presidency and split Congress. The expectations are additional fiscal spending, limited tax increases, and few new regulations. We think this will put the Federal Reserve under pressure if economic indicators disappoint in the coming months and we could see purchases of longer dated maturities followed by an increase in the current Asset Purchase Program (APP) early next year.
Following the uncertainty surrounding the US election, markets lit up early last week due to the fantastic COVID-19 vaccine developments. Vaccine trials produced positive results in more than 80% of the subjects indicating vaccines might be more effective and available sooner than initially thought. With more than 50 million confirmed cases worldwide and an unbelievable death toll of 1.3 million, all countries would benefit from an effective vaccine. The 2020 baseline forecast for global GDP continues to show a sensibly negative growth rate before recovering to around +4-6% in 2021, depending on the global availability of vaccines.
The US economy experienced its sharpest decline since the Great Depression in Q2/2020, but accelerated during the third quarter. Over the summer, various economic indicators rebounded at a faster than anticipated rate. According to the October employment report, 638,000 new jobs were added bringing the newly created jobs figure since May to over 12 million and the unemployment rate down to 6.9%. At the same time, total light vehicle sales as well as manufacturing activity showed robust growth for the fifth consecutive month, pushing the ISM Manufacturing Index up to 59.3 points. However, with the renewed uptick in COVID-19 cases, GDP expansion in Q4 could come in below expectations leaving a 2020 growth rate of around -3% and 2021 growth rate of approximately +3.5%. Such an outcome would bring the US economy back to pre-pandemic levels in the second half of 2021, at the earliest. In the absence of additional fiscal support, Federal Reserve Chairman Jerome Powell was clear about the fact that monetary stimulus works indirectly and has a time lag relative to fiscal stimulus. Yet, with the Fed’s revision of its monetary policy framework and the change of its inflation target from the previous 2% level to an “Average Inflation Target”, it has established ample room to maneuver swiftly. Investors are eager to learn more about President-Elect Biden’s team, their programs, and future policy moves. The Joe Biden victory combined with a Republican Senate and Democratic House could be slightly positive for the economy with some fiscal stimulus, limited tax increases, and few new regulations. There is also an expectation of slowly increasing inflation and interest rates.
The German economy, in line with its European peers, emerged from recession in the third quarter. Industrial production has turned from contraction in Q2 to expansion during the summer, accompanied by significantly better consumer sentiment. Consumption has brightened throughout Q3 supported by falling prices and reduced VAT. However, additional restrictive measures to fight the second wave of COVID-19 announced by the German government at the end of October will counteract the positive momentum. Meanwhile, the cabinet approved the 2021 draft budget, which focuses mainly on investments and includes new debt of EUR 96B to provide further support to victims of the pandemic. Across the Euro Area, export-oriented companies have experienced a strong increase in orders over the last three months, signaling a positive change in external trade. However, labor markets are still dependent on short-labor benefits and unemployment schemes with most Euro Area countries extending the programs launched in spring. In addition, a flare-up of infections is forcing governments across Europe to implement new measures such as curfews, partial shutdowns, and lockdowns, which will inevitably weigh on economic activity over the coming weeks and decrease Q4 GDP forecasts.
Eurozone GDP is expected to contract by more than 6% in 2020 before rising to over 5% next year, which will not be enough to bring the Eurozone back to pre-pandemic levels in 2021. The divergence in the pace of the recovery across European countries is already visible and will become even more pronounced depending on the implementation of different restrictive measures. Meanwhile, the ECB has indicated that it is considering a mix of policy options to be discussed during the next council meeting while for now, carrying on with the full flexibility of its current bond-buying plan.
In Switzerland, manufacturing PMI stayed in positive territory for a third consecutive month during October indicating the economy is well into expansionary territory. Since the end of the lockdown, the increase in unemployment has stabilized while the labor market saw a lower level of short-term work than expected leaving the unemployment rate below 3.5%. Due to the relatively positive environment, economic prospects for Switzerland are not as negative as feared with an expected GDP growth rate for 2020 of -3.8% before recovering to around 4.5% in 2021. However, the steep increase in COVID-19 cases since mid-October could spur the government to implement restrictive measures again.
After positive GDP growth rates in the UK since early summer, the monthly GDP tracker for the month of October missed the previous month’s reading and consensus expectations suggest that current virus suppression efforts could limit 4th quarter growth to around 1%. Moreover, renewed uncertainty about any future trade deal between the UK and the EU is weighing on investments and consumption. Given this uncertain outlook, the British government has decided to extend the current Job Retention Scheme and keep it open until March 31, 2021.
While in Q2/2020 Japan experienced its steepest post-war GDP contraction, the country still outperformed most other advanced economies highlighting the effectiveness of its pandemic response, which limited the fall in private demand. Economic prospects are brightening with rising external demand, increasing household spending, and robust public consumption and investments. However, the rebound will not fully compensate for the significant slump earlier in the year and Japan will not reach pre-pandemic levels before late 2021.
The Chinese economy has seen significant improvement since the COVID-19 outbreak and many indicators are pointing towards positive GDP growth over the year. The consumer and service sectors have started to catch up with the manufacturing sector with consumers returning to shops and restaurants and boosting private consumption. At the same time, fiscal policy will remain highly supportive for now and credit creation should stay solid. Meanwhile, investments in export-oriented companies remained weak due to ongoing tensions surrounding China-US trade and it remains to be seen how the new US administration will adapt its trade policies over the coming years. Altogether, we expect the Chinese economy to display a growth rate of more than 2% in 2020 before trending around 5.5% in 2021. The Central Committee of China set the outline for its upcoming five-year plan for the period 2021-2025. For the first time, it does not include a growth target for the overall economy and instead highlights strategies to reduce foreign dependency by relying more on domestic suppliers and consumers, replacing high-speed with high-quality growth, and promoting high-end intelligent and green manufacturing.
15 Asia Pacific nations including China, Japan, and Australia, reached a new Asia Pacific free trade agreement (RCEP) over the weekend. This agreement defines the largest global free trade zone. This agreement will reduce barriers and consolidate trade in an area covering 2.2B consumers and a third of the world’s economic output adding potentially several hundred billion to the global economy by 2030.
- Sabina Weber Sauser, Senior Investment Manager, UBP IAS
Compliments of UBP Investment Advisors S.A. – a member of the EACCNY.