This week the Eurozone’s four largest economies - Germany, France, Italy and Spain – announced nationwide measures to counter second virus waves sweeping across the region. The new restrictions have hurt business confidence and caused the EUR to fall further below its two year high of 1.20 against the USD hit in September.
The charts show October’s Purchasing Manager Index (PMI) and economic confidence data for the Eurozone and October’s German IFO survey of business sentiment have all stopped rising. In contrast, the economic releases all bounced sharply in Q3’20 as Europe’s economies reopened after the first virus waves of Q2’20. The new restrictions on activity, however, are substantially less stringent than April’s.
The authorities are limiting social and leisure time by closing bars, restaurants and gyms while schools and most businesses stay open and employees are encouraged to work from home. In France and Germany, the restrictions have initially been set for November and if successful should see daily infections start to fall in the first half of the month before hospitalisations and fatalities decline in the second half. Thus, we expect the Eurozone’s PMI survey is likely to weaken from 49.4 for October but not plunge as it did in March to 29.7 and April to just 13.6.
The European Central Bank will also support the economy in Q4’20. The ECB kept monetary policy on hold this week. But President Christine Lagarde signalled further easing was likely at its next meeting in December, noting: ‘the euro area economic recovery is losing momentum more rapidly than expected. We agreed that it was necessary to take action and therefore to recalibrate our instruments at our next Governing Council meeting.’ We expect the ECB will expand its new EUR1.35 trillion Pandemic Emergency Purchase Program by another EUR500 billion of bond buying but will not lower its -0.50% deposit rate further into negative territory.
Thus, the Eurozone is likely to experience no GDP growth now in Q4’20 - but not suffer the record contraction of -11.8%QoQ in Q2’20 – before returning to growth in the new year as the virus becomes contained. This will allow the EUR to resume its long-term uptrend against the USD. We keep our one year forecast of 1.25 here.Disclaimer applicable to recommendation
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