Euro Area Economy in a Snapshot Q3 2020 Report

Economic Outlook

The economy of the Euro Area is forecast to enter its deepest recession on record according to our proprietary CEIC Leading Indicator. The smoothed indicator fell below 100, the threshold between expansion and contraction of economic activity, in November 2019 and has plummeted since then. The CEIC Leading Indicator plunged to a historic low of 61.68 in June 2020. In comparison, during the 2008 financial crisis the indicator hit a trough of 70.77 in February 2009, while during the 2012 European debt crisis it fell to 79.99. The non-smoothed leading indicator fell to 40.6 in the peak of the economic shutdown in April and rebounded to 76.5 in June, suggesting that the economy is still way below its pre-pandemic level.

According to data from Markit’s Purchasing Managers’ Index, the eurozone economy has merely stabilized and is yet to show signs of recovery. In April, the seasonally adjusted manufacturing PMI plunged to 33.4 – a value reached during the peak of the 2008 financial crisis. Although the PMI rebounded to 47.4 in June, the reading does not suggest a recovery to pre-pandemic levels but rather a slowing rate of decline of economic activity.

The Governing Council of the ECB did not deliver any surprises during its July 16, 2020 meeting. The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0%, 0.25% and -0.5% respectively. The purchases under the pandemic emergency purchase programme (PEPP) will continue to be performed to ease the overall monetary policy stance at least until the end of Q2 2021. The Governing Council will continue the purchases under the asset purchase programme (APP) at a monthly pace of EUR 20bn coupled with the additional EUR 120bn temporary envelope until the end of 2020. The targeted longer-term refinancing operations will also continue to support bank lending to companies and households.