Macroeconomic focus – December 2020

Economic rebound

December’s flash (1)PMI surveys reveal a sharp rebound in eurozone business activity. The composite PMI rose from 45.3 to 49.8, returning close to the level that prevailed in October before November’s sharp fall. The services PMI rose significantly from 41.7 to 47.3, and the manufacturing index hit a two and a half year high at 55.5, up from 53.8. While this rebound suggests that the economy has bottomed out and an upturn has begun, the figures need putting into perspective.

On the one hand, changes in the November and December PMI surveys primarily reflect changes in COVID restrictions. On the other, linking the PMI survey numbers to any given level of economic activity is difficult. The fact that November’s fall has been recouped does not mean that (2)GDP has returned to the level seen in October. This could take several months and according to the latest (3)INSEE estimates, the French economy may not return to its October 2020 level until March 2021. Furthermore, December’s PMI survey data only cover the period from 4–15 December, which was before schools and non-essential shops were closed in Germany and the Netherlands. The PMI numbers are therefore likely to be revised downwards.

On the positive side, the 12-month outlook index continues to improve, as good news on vaccines suggests that the pandemic will subside and the restrictions that are dragging on economic activity will eventually be lifted. Until herd immunity can be broadly established, the pandemic will continue to require close monitoring. While cases appear to have peaked in the eurozone, new case numbers are no longer falling and in some countries are even turning back up, which is slowing down the reopening of economies.

In order to preserve favourable financing conditions and support the economic recovery, the (4)ECB, as expected, announced it was recalibrating its monetary policy. The bank has raised funding for the Pandemic Emergency Procurement Programme ((5)PEPP) by €500 billion to €1,850 billion and extended it until March 2022, although it also clarified the programme would not necessarily be fully utilised. Furthermore, the ECB has strengthened its support for the banks by modifying the terms of its long-term negative interest rate loan programme ((6)TLTRO – targeted longer-term refinancing operations). Additional operations have been scheduled, the amounts that can be borrowed have been increased, and subsidised interest rates for TLTRO operations have been extended by one year.



(1)PMI: PMI indices are confidence indicators that summarize the results of surveys conducted among company purchasing managers. A value greater than 50 indicates a positive sentiment in the sector concerned (manufacturing or service).

(2)GDP (Gross Domestic Product): Total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.

(3)INSEE: The National Institute of Statistics and Economic Studies is responsible for the production, analysis and publication of official statistics in France.

(4)ECB: European Central Bank.

(5)PEPP: Pandemic Emergency Purchase Programme, temporary asset purchase programme of private and public sector securities.

(6)TLTRO: The targeted longer-term refinancing operations are Eurosystem operations that provide financing to credit institutions.

Signs that the recovery is losing steam

The latest economic indicators are lacklustre as the year comes to an end amid tighter health restrictions due to a deteriorating pandemic situation.

Job creations slowed sharply in November, down from 610,000 to 245,000 and at this rate, it would take three years for employment to return to February’s pre-pandemic level. While unemployment fell by 0.2 percentage points in November to 6.7%, the improvement is linked to a decline in the participation (1)rate. Weekly unemployment registrations also rose in the first two weeks of December.

Household consumption is showing signs of slowing, with retail sales falling by 1.1% in November. Declines have been widespread but particularly marked in the restaurant sector, where in contrast with most other categories, sales have not yet returned to pre-crisis levels.

While consumption is showing signs of weakness, (2)Federal Reserve quarterly data are confirming a counterintuitive impact of the Covid-19 crisis: US households are considerably better off than previously. The extent of the support measures put in place by the government has more than compensated for householders’ lost earnings, alongside which they have sharply reduced their consumption of services due to the COVID restrictions. This has resulted in householders accumulating significant savings.

Net household deposits have risen by $1,527 billion over the last two quarters, while total household debt has increased by only $307 billion. Net indebtedness has plunged by $1,220 billion, the equivalent of a full month of consumption spending. In current (3)dollars, net debt is now at its lowest level since 1993 and as a percentage of disposable income, it is at its lowest level since 1991.

This sharp decline in US household net indebtedness is a very positive factor for the recovery that should emerge when the economy exits lockdown, a prospect underpinned by the start of the vaccination campaign. In addition, fiscal support and stimulus measures are on the horizon, with the bipartisan proposal calling for a $900 billion package that would include additional unemployment benefit, support for (4)SMEs, and another round of stimulus cheques paid directly to US households.



(1)Participation rate: The labor force participation rate is a measure of an economy’s active workforce. The formula for the number is the sum of all workers who are employed or actively seeking employment divided by the total noninstitutionalized, civilian working-age population.

(2)Federal Reserve: Central bank of the United States.

(3)Current dollars: value of a currency in the current period. The term “constant dollars” refers to multi-year dollars expressed in terms of their value (“purchasing power”) in a year, called the base year. For example, to move from a current dollar to a constant dollar, and remove the impact of price changes, the calculation is as follows: (current dollars/price index) x 100 = constant dollars.

(4)SME: Small and medium-sized enterprises consist of enterprises which employ less than 250 persons and either have an annual turnover not exceeding EUR 50 million or a balance sheet total not exceeding EUR 43 million.

Economy on the right track

November’s economic data reveal that China’s recovery continues to progress. Supply-side data show industrial output increased by 7.0% year on year, a rate that has remained stable over the last three months and is similar to the rate observed before February’s sharp fall. The growth in services continues to accelerate and increased by 8.0% year on year.

Demand-side data show November’s retail sales up 5.0% year on year following 4.3% year on year in October. While price effects mean the rate is lower than at the beginning of the year, retail sales in terms of volume rose by 6.2% year on year, which is faster than before the COVID crisis.

Investment expenditure is still gathering pace and rose 9.7% year on year. Although the primary factor driving investment for several months has been the real estate sector, November’s spending shifted towards manufacturing (+12.5% year on year following 3.5% in October). Infrastructure investment has remained relatively stable over the last three months (+3.5% year on year).

Exports remain strong, rising from 11.4% year on year in October to +21.1% year on year in November. While COVID-related exports (masks and medical instruments) rose sharply, they were not the primary factor driving the month’s overall rebound. Imports are relatively stable (+4.5% year on year), taking the trade surplus to an all-time high of $75 billion.

(1)PMI surveys continue to send positive messages with the (2)Caixin and (3)NBS survey average up from 52.5 to 53.5 in the manufacturing sector and from 52.5 to 53.5 in the services sector. Both are now at their highest levels since 2011.

Inflation slipped into negative territory, falling from +0.5% year on year in October to -0.5% year on year in November, with half of the shift due to falling pork prices (-12.5% year on year versus -2.8% year on year in October). Underlying inflation, however, has been stable for five months at +0.5%.

Credit expansion slowed to 13.6% year on year in November. This is the first slackening since the start of the pandemic, which could be an indication that the authorities are starting to reduce their support as the return to normal is well underway.



(1)PMI: PMI indices are confidence indicators that summarize the results of surveys conducted among company purchasing managers. A value greater than 50 indicates a positive sentiment in the sector concerned (manufacturing or service).

(2)NBS (National Bureau of Statistics of China): agency responsible for collection, investigation, research and publication of statistics concerning the nation’s economy, population and other aspects of the society.

(3)Caixin: PMI indicator of the strength of the Chinese economy.

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The opinion expressed above is dated 22 December 2020, and is liable to change.

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