It is quite likely that, going forward, fighting recessions will be the remit of governments with central banks facilitating this task by creating cheap financing conditions. As a consequence, public indebtedness may very well remain high.One should wonder whether this could end up having negative consequences. A possible transmission channel is the pricing of government debt via a sovereign risk premium. Another factor can also play a role. Since 2015, when German bond yields increased, the rise in Italian yields has been even bigger -so the spread widens- whereas French yields has increased in line with German yields
In order to get a feel about how the Covid-19 pandemic has influenced activity in 2020, it is sufficient to look at one single chart, the composite PMI. Data plunged globally in March and troughed at very low levels in April. The third quarter saw strong activity with readings above the crucial 50 level in most countries. Under the influence of a new wave of infections, sentiment dropped again in the eurozone in November. In the US on the other hand, the index remained well above 50...
The year 2021 starts under pressure from the rising number of Covid-19 cases in numerous countries. In Europe in particular, countries have had to tighten their health restrictions to contain the spread of the virus. In the weeks ahead, these new restrictions are bound to have a further negative impact on consumer traffic flows in the retail and leisure sectors...
The world is rapidly warming up. Between 2010 and 2020, the average temperature increased by around 0.3°C, taking the global warming up to 1.2°C since the pre-industrial time. At this pace, global warming will exceed the Paris objective of 1.5°C before the end of this decade. The impact of global warming has already been felt in many parts of the world: devastating fires in California and Australia, inundations of coastal areas, and prolonged droughts in already dry places. An annual average of 21.5 million people have been forcibly displaced by weather-related sudden onset hazards – such as floods, storms, wildfires, extreme temperature – each year since 2008 (Source: UNHCR). This number could reach 150 - 200 million by 2050
Narratives – the stories people tell about events – may influence behaviour. In future years, several narratives may very well be used when looking back at economic developments in 2020. Big, unanticipated shocks do happen. In terms of monetary policy, a ‘whatever it takes’ attitude prevails. This also applies increasingly to fiscal policy. In terms of financial markets, the dominant attitude towards risky assets is to buy rather than to say ‘bye bye’. With Next Generation EU, the European Union has again demonstrated that, under pressure, it can make big leaps forward. Finally, attention to sustainable growth has become ubiquitous. Some of these narratives provide comfort but several also come with a warning.
At the approach of the holiday season and fearing another resurgence in the coronavirus pandemic, several European countries have tightened their lockdowns to contain the level of contamination. We can expect that in the weeks ahead, these new restrictions will have a clear impact on the momentum of retail and leisure traffic flows. Over the past week, momentum was already stagnant in most of the European countries, as illustrated by the Google Mobility Report released on 13 December...
Until the very end, 2020 has been a difficult year, to say the least. However, there are reasons to be cautiously hopeful about the economy in 2021. Vaccination should reduce the uncertainty about the economic outlook. Ongoing fiscal and monetary support is also important. However, more than ever, caution is necessary in making forecasts. Reaching herd immunity may take longer than expected and some of the economic consequences of the pandemic may only manifest themselves over time.
The composite PMI is stabilising at the global level but this is masking strongly diverging trends. The US and China continue to improve, India is a bit weaker but still at a very high level, whereas the UK has dropped slightly below 50. The big decline occurred in the Eurozone with the index dropping from 50.0 to 45.3...
The Federal Reserve and the ECB have been highly successful in influencing asset prices as part of their effort to cushion the shock to the economy from the Covid-19 pandemic. However, one might wonder whether today’s relief could cause an investor’s headache tomorrow. The difficulty of an exit strategy does not imply that certain monetary tools should not be used in the first place. After all, they do have positive effects. However, the likelihood of a bumpy normalisation process of monetary policy calls for careful preparation by central banks as well as investors. These considerations could become particularly relevant should the recovery in 2021 end up surprising to the upside.
Google's latest report on mobility (Google Mobility Report), published on November 29, shows encouraging momentum in customer traffic of retail and recreation in Europe at the end of that month...
The prospect of the deployment of a Covid-19 vaccine has raised expectations that the stop-start cycle seen this year will make way for a lasting economic recovery in 2021. There is concern however that bringing the pandemic under control could take more time than is currently assumed in economic projections. Under such a scenario, worries about possible new restrictions would remain elevated, although one can assume that, because of vaccination, these measures would be less strict than before and more local. Nevertheless, in the more exposed sectors, investment and employment could be clear victims.
According to Google’s latest Mobility Report, published on 22 November, customer traffic in the retail and recreation sectors in France, Belgium and the UK remains far below baseline* levels at 59%, 56% and 51% respectively on a seven-day moving average (Figures 1 and 2). However, a degree of stabilisation is noticeable, after the sharp drop seen in the early days of the autumn lockdowns...
Customer traffic flows fell sharpest in the countries that were hit hardest by the second wave of the pandemic and that implemented full lockdowns, according to Google mobility reports...
The announcement that a Covid-19 vaccine that is under development is highly effective caused major reactions in financial markets, reflecting a feeling that the growth outlook has changed. The prospect of a vaccine offers hope that in the medium run activity will normalise, but the positive impact on growth will take time to materialise. Clearly, the view that better times are ahead of us very much depends on the horizon one takes. However, decisions of households and businesses not only depend on expected growth of income and profits but also on the distribution around the growth forecast. The prospect of a vaccine reduces the probability of very negative outcomes and this reduction in uncertainty should eventually contribute to a pick-up in growth.
Market action last week largely reflected expectations of how the result of the US elections would shift the balance between fiscal and monetary stimulus. Federal Reserve Chair Powell insisted on the need for more fiscal policy support but also hinted that, if need be, more monetary easing would occur. In the UK a coordinated approach has been adopted. The Bank of England will increase its purchases of government bonds and the government will prolong its income support for employees being out of work. Fiscal policy will remain centre stage for many years to come.
The composite PMI saw a big improvement in India, for the second month in a row, and to a lesser degree in the US and China. In these 3 countries, the index is at its highest level of the past 11 months. The euro area countries saw a mixed performance. Significantly better in Ireland, slightly better in Germany but weaker in France, Italy and for the euro area as a whole. There was a big drop in the UK...
Activity was already slowing before the new lockdown measures and the latter will act as an additional brake. We are living in a stop-start economy. The contraction of activity should be more limited than in March-April. The measures are less strict for economic activity, businesses are better prepared and exports should benefit from a more dynamic business environment, in particular in Asia, compared to what happened in spring.The stop-start recovery should also have negative consequences that go beyond the near term. Uncertainty may last for longer which entails increased risk of bigger scars like a rise in long-term unemployment or corporate bankruptcies. It may intensify disinflationary forces and increases the burden on public finances
For a large sample of developed economies, government debt as a percentage of GDP has been on a rising trend over the past 40 years. High public sector debt weakens the resilience of the economy to cope with interest rate and growth shocks. This calls for embarking, at some point in time, on a fiscal consolidation. Clearly, now is not the time. The economy is still recovering from the Covid-19 shock and the outlook remains highly uncertain. Nor is there any urgency, considering the very low interest rates. However, the absence of urgency in the near term should not make us forget about the necessity to act at a later stage. Otherwise, the resilience of the economy would weaken further. It would also represent a bet that in every downturn, central bank QE will come to the rescue.
On 16 September, the Single Supervisory Mechanism (SSM) for the euro zone announced the temporary exclusion of reserves with the Eurosystem from the calculation of leverage ratios at major banks. Similar relaxations had been introduced a few months earlier in the USA, Switzerland and the UK. The exceptional measures taken by public authorities to bolster liquidity have resulted in a significant expansion of banks’ balance sheets. Fearing that leverage requirements could hamper the transmission of monetary policy and affect banks’ abilities to lend to the economy, first regulators and then supervisors have temporarily relaxed such requirements
The Covid-19 pandemic will have profound longer-term consequences. Certain industries will benefit, directly or indirectly, whereas others will suffer.The idea of thriving industries full of new opportunities and others struggling to survive reminds us of Schumpeter’s creative destruction. Such a process can entail huge costs in the short run. Research shows the key role played by active labour market programmes. More broadly, economic policy not only needs to focus on the demand side but also, and increasingly, on the supply side so as to avoid that the pandemic acts as a lasting drag on growth.
A key question in assessing the pace of the recovery in coming quarters is what will happen to corporate investment. Financial analysts are expecting profits of US companies to increase. If confirmed, we can expect better cash flows which, based on historical relationships, should lead, with some delay, to a rise in capital formation by companies. However, there is a possibility that companies which have seen a pandemic-induced rise in indebtedness would prefer to use their extra cash to pay back debt. Cash flow uncertainty is another factor that could weigh on the willingness to invest.
The PMI data for September saw diverging trends, between sectors and geographies. The composite PMI has been stable in the US in September after rebounding the month before. In the euro area however, the jump in July was shortlived and after the sharp drop in August, September saw another decline, leaving the PMI just above the 50 threshold...
In recent decades, the experience in many countries has been that the decline of the public debt ratio during expansions did not compensate for the increase during recessions. This could end up creating concern about sovereign risk and influence the borrowing cost. Under the assumption of permanent reinvestment of maturing paper, significant holdings by the central bank of government paper as a result of quantitative easing, could limit this risk. This depends on the interest rate on excess reserves and on whether such a policy ends up generating higher inflation and/or inflation expectations.
For several weeks now, the improvement in economic data has been slowing down. On the one hand, this loss of momentum is unsurprising as it followed a substantial rebound which could not last. On the other hand, this fall could reflect the economic reaction to the rise in the number of new Covid-19 cases in many countries. Furthermore, the level of uncertainty which remains very high, affecting households and businesses, should also play a role. As a result, monetary and especially fiscal policies remain crucial in ensuring that the recovery continues pending the release of a vaccine.
Declining effectiveness of monetary policy and increased fiscal policy space make the case for increased public debt issuance in combination with quantitative easing to boost growth. There is concern that such policy coordination would lead to fiscal dominance whereby monetary policy is dictated by considerations in terms of public finances to maintain public debt sustainability. Once the pandemic will be behind us, governments will have the responsibility to improve their public finances. Inaction in this respect would put the burden on the ECB when fighting future downturns. It would be a different type of fiscal dominance.
