Euro Area Economy in a Snapshot Q4 2020 Report

Economic Outlook

The economy of the Eurozone is set for recovery from September 2020 onwards according to the CEIC Leading Indicator. After a deep dive to 37.6, way below the threshold of 100 separating expansion from the recession, the indicator has recovered and in September 2020, it rose to 101.0, indicating economic growth. However, according to the smoothed version of the CEIC Leading Indicator, which stood at 96.9 in September, the Eurozone economy is yet to begin an expansionary cycle.

According to the IHS Markit Purchasing Managers’ Index (PMI), the manufacturing sector of the Eurozone was improving throughout Q3 2020, with the seasonally-adjusted PMI rising further above 50 (dividing expansion from contraction) to 54.4 in October. The index rose on the back of increases to the output and new orders components, to 57.8 and 58.1 respectively in October. 

A reading of 46.7 for the employment component, down from 47.1 in September suggests a sluggish recovery of employment in the manufacturing sector. The services sector business activity index fell to 46.2 in October, indicating the sector has yet to begin a meaningful recovery. The services sector employment index rose slightly to 48.5 but remained below 50 throughout Q3 2020, suggesting a predominantly pessimistic outlook.

The Governing Council of the European Central Bank (ECB) did not deliver any surprises at its monetary policy meeting on September 10, 2020, keeping its interest rates and quantitative easing (asset purchase) programme unchanged to support the economy with sufficient liquidity. The interest rate on the ECB’s main refinancing operations and the interest rates on the marginal lending facility and the deposit facility were kept unchanged at 0%, 0.25% and -0.5% respectively. The ECB also confirmed that purchases under the pandemic emergency purchase programme (PEPP) would continue until at least the end of Q2 2021 and that it would also continue net purchases under the asset purchase programme (APP) at EUR 20bn per month, 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.

According to the IMF’s latest World Economic Outlook, released in October 2020, a real GDP contraction of 8.3% y/y is expected for the Eurozone in 2020, followed by a 5.2% y/y recovery in 2021. Among its main constituent member states, in Germany real GDP is forecast to shrink by 6% in 2020, while the economies of France, Italy and Spain are expected to contract by 9.8%, 10.6% and 12.8%, respectively.