Macroeconomic picture - November 2020

• United States: the US economy rebounded in Q3, exceeding our expectations and leading to a further upside revision of our 2020 GDP forecasts. However, given the signs of a progressive deceleration in several economic and behavioural indicators, influenced by the new rise in Covid-19 cases, we are more cautious about the speed at which the economy will enter 2021. After some softening in H2 2020, headline inflation should move higher, with a temporary mid-year overshoot due to reversing oil price base effects. It will then revert to the target. As November 3 approaches, policymakers’ focus is shifting, with an increased risk that 2020 fiscal policy will become more diluted than expected, and with little visibility on the Phase 4 deal in particular.
• Eurozone: after the strong rebound in early Q3, we have revised our forecasts for 2020 slightly upwards. However, the recovery curve for the Eurozone economies has flattened significantly, affected by the second wave of Covid-19, aggravating concerns of a potential slowdown in economic activity in Q4. We expect a progressive pickup in both domestic and external demand, supported by an extraordinary easing of monetary policy and counter-cyclical fiscal policies. Inflation should remain subdued in the near term with possible downside risks before moving gradually higher in 2021, yet remaining somewhat below target. Temporary extensions of furlough schemes are preventing severe distress in the labour market, although we expect the unemployment rate to continue increasing in early 2021.
• Japan: the latest data confirmed our view of a slow economic recovery. The second wave of Covid-19 cast a shadow over consumption and business sentiment, while mobility and domestic tourism were less hit than in April, thanks to the government’s Go To Travel scheme and less stringent restriction measures. External demand started to bottom out, but Japanese export recovery lags behind its East Asian peers. Overall, we expect investments to bounce back at a slower pace than exports and consumption, and forecast GDP remaining below pre-pandemic levels until 2022.
• United Kingdom: the economy grew at a sustained pace during the summer, technically rebounding from the Q2 dip. The Covid-19 resurgence and new restrictions being implemented nationwide led to a significant deceleration in economic activity from September and rising concerns of a rapid deceleration in Q4. The labour market remains under pressure, despite the new job support schemes introduced to replace the previous furlough schemes. A new round of fiscal support is more likely, together with some easing on the monetary front later in the year with additional Brexit downside risk looming as negotiations stall.

• PBoC (China): the Loan Prime Rate (LPR) remained unchanged for the sixth consecutive month in October, as we had expected. On 21 October, Governor Yi said he expected China’s macro leverage ratio to stabilise in 2021, after rising by 21ppt to 266% at the end of H1 2020 from end-2019 to mitigate the damage caused by the pandemic. The latest focus by policymakers on balancing growth and risk prevention signals a shift away from a loose regulatory environment. In light of this policy adjustment, we expect total social financing growth – the proxy for credit impulse – to stabilise and peak.
• RBI (India): in its latest meeting, the RBI left its policy rates unchanged, as expected. The appointment of three new members (aimed at increasing the RBI’s dovish bias) did not bring any change in policy rate levels while a major dovish tilt was anticipated by the Governor in the form of possibly stronger QE going forward. Should the RBI adopt less orthodox monetary policy measures, a stronger fiscal strategy would need to be in place in coordination with the Ministry of Finance. A dovish stance was confirmed though inflation should offer little room for easing in the short term (0/-25bps).
• BCB (Brazil): The easing cycle ended in September when the BCB stayed on hold at 2% and removed references to further easing (any leeway being limited) in the QIR. The focus has since shifted to forward guidance (FG) - rates are to stay on hold until inflation gets sufficiently close to the target. The FG, however, is also a function of spending cap (SC) compliance and will be unwound if the latter is breached - the CB will not tolerate inflationary risks emanating from the markets and raising questions as to the country’s fiscal credibility. We think a temporary SC breach for fiscal reform would satisfy the markets and the BCB, and also give growth some necessary support.
• CBR (Russia): The CBR left the policy rate unchanged at 4,25% at the October 23rd meeting, as was the case on September 18th. The CBR mentioned a set of factors impacting inflation in different directions, including an increase in inflation expectations, a slowdown in the economic recovery, increased market volatility and its potential negative impact on the rouble. The CBR expects inflation to end up very near the target of 4% at year-end. Nonetheless, the central bank still sees room for a rate cut especially in the medium-term due to disinflationary risks.

• Scenarios

The probabilities reflect the likelihood of financial regimes (central, downside and upside scenario) which are conditioned and defined by our macro-financial forecasts.

• Risks

The probabilities of risks are the outcome of an internal survey. Risks to monitor are clustered in three categories: Economic, Financial and (Geo)politics. While the three categories are interconnected, they have specific epicentres related to their three drivers. The weights (percentages) are the composition of highest impact scenarios derived by the quarterly survey run on the investment floor.