Macroeconomic focus – November 2020

A smaller economic shock than in the spring

Eurozone (1)GDP figures for the third quarter show that growth rebounded a non-annualised 12.6% after a second quarter fall of 7.6%, taking GDP to 96% of its pre-crisis level. It reached similar levels in France, Germany and Italy, but not in Spain where growth remains at 91% of pre-crisis levels. The economic recovery is therefore relatively uniform across the eurozone and independent of the severity of the rules imposed during the first lockdown, as the recoveries have been stronger in the nations that were hit worst.

With the re-introduction of strict lockdowns in October and November, fourth-quarter eurozone GDP is likely to contract once again. While this contraction can be expected to be significant, it should be less severe than in the spring because several sectors that came to a standstill during the first lockdown, such as industry and construction, continue to operate this time. (2)INSEE estimates that French GDP will fall back to 87% of normal levels in November. At the height of the pandemic in April, it fell back to 70%.

The pace of economic recovery will clearly depend on lockdown arrangements in the weeks ahead. The good news is that the pandemic looks like it has peaked across the eurozone, paving the way for a lifting of restrictions and an economic rebound from December onwards.

The (3)ECB has indicated that it will take additional measures to underpin the economic recovery in December. Until widespread immunity to COVID-19 has been reached and while encouraged by the vaccine news, ECB chief Christine Lagarde does not rule out further spikes in the pandemic that would entail lockdown measures and frequent false starts for the economy. The ECB would prefer to readjust its emergency purchase programmes and targeted long-term loans before lowering interest rates further.

In terms of monthly economic indicators, November’s (4)PMI surveys fell, but to a lesser extent than in the spring. The eurozone flash composite PMI estimate fell from 50.0 in October down to 45.1, which is well above April’s low point of 13.6. The decline was less pronounced in Germany (-3.0 points to 52.0) than in France (-7.6 points to 39.9) where lockdown rules are stricter. As in the spring, lockdown has affected the service sector more severely than the manufacturing sector. The eurozone manufacturing PMI fell from 54.8 to 53.6 while the services PMI fell from 46.9 to 41.3.

(1)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.

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

(3)ECB: European Central Bank.

(4)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).



Joe Biden to be the 46th US President

Although it took about ten days for all 50 US States to finally publish their presidential election results, there is no longer any doubt that Joe Biden will be inaugurated as the 46th president of the United States. The Democrat candidate enjoys a comfortable lead over his Republican rival with 306 Electoral College votes versus 232 for the outgoing president. We will have to wait until the College vote on 14 December for Mr. Biden to be officially elected and President Trump will remain in office until Mr. Biden’s inauguration on 20 January. While the current incumbent has still not admitted defeat, the Republican camp’s allegations of voting fraud appear to be unfounded and the courts have rejected several claims.

In terms of Congressional voting, results from some districts are still unknown. The Democrats will retain their majority in the House of Representatives, even though they are set to enter the next term with slightly fewer seats. In the Senate, Republicans have won 50 of the 100 seats and the Democrats have won 48. Two seats are still up for grabs in the State of Georgia and will be allocated after a second round of voting on 5 January. President-elect Biden is the first Democrat to win Georgia since Bill Clinton back in 1992, but the Senate polls are tight, to say the least. If Republicans and Democrats tie with an equal number of Senate seats, then Democrat Vice President-elect Kamala Harris will hold the tie-breaking vote.

The first step for President-elect Biden will be to pass a new economic recovery plan. Democrats have campaigned for an extraordinarily large stimulus plan of at least $2 trillion, which would be financed in particular by higher taxes on companies and the wealthiest individuals. If the Democrats fail to secure Senate control, then the taxation proposals will not win approval. The US equity market would welcome this news since the full Democrat package would probably lead to a fall in profits of around 10% for S&P 500 companies.

On the economic front, third-quarter (1)GDP rebounded by a non-annualised 7.4% following a 9.0% decline in the second quarter, taking GDP back to 97% of its pre-crisis level. October’s employment report was positive with 638,000 new jobs created and the unemployment rate falling by a full percentage point to 6.9%. November’s manufacturing (2)PMI rose from 53.4 to 56.7 and the services PMI also rose from 56.9 to 57.7, suggesting that the latest surge in the virus and the consequently tighter rules are not overly disrupting economic activity.

(1)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.

(2)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).


The recovery continues strong

October’s economic indicators show that China’s economic recovery was still going strong at the start of the fourth quarter. Supply-side data show industrial output is stable at 6.9% year on year, which is similar to the rate observed before February’s sharp fall. At 7.4% year on year, the growth in services continues to accelerate. The real estate services and technology sectors are particularly buoyant, while business in the accommodation and restaurant sectors is gradually improving.

Demand-side data show October’s retail sales up 4.3% year on year compared with 3.3% year on year in September. While these figures fall short of last year’s average growth rate of 8%, some categories, such as car sales, are growing at a faster pace (+12.0% year on year). Beauty product sales are also robust (+18.3% year on year) and restaurant sector numbers are back in positive territory (+0.8% year on year). Investment expenditure grew 12.2% year on year driven by increased spending in the real estate sector.

Exports remain strong, up 11.4% year on year in October versus 9.9% year on year in September. Although these numbers may be affected by the recently tightened lockdowns across Europe, any fall should only be temporary. September’s extremely high import numbers slowed slightly in October, falling from 13.2% to 4.2% year on year. US foreign trade data indicate that for the first three quarters of the year, the value of Chinese purchases of products covered by the bilateral trade agreement reached $56 billion, or 40% of the $143 billion target. While Joe Biden’s election is unlikely to completely erase the trade and technology stand-off between China and the United States, the new administration may adopt a more multilateral approach than the previous one.

The Chinese Communist Party has published its recommendations for the 14th Five-Year Plan as well as its long-term goals for 2035. They include the possibility of doubling (1)GDP and GDP per capita by 2035 to reach middle-income-country level, which implies average annual growth of 4.7% over the next 15 years. The authorities also stress the importance of continuing to rebalance growth, reduce inequalities, improve environmental protection and strengthen innovation.

(1)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


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The opinion expressed above is dated 24 November 2020, and is liable to change.

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