Economic Outlook – 1 November 2020


  • The American economy rebounded sharply in Q3 following one of the steepest contractions on record in Q2. Economic growth accelerated at a 33.1% annualized pace, re­covering about two-thirds of the activity lost in the first half of the year. Overall, real GDP is still 3.5% below where it was at the end of 2019. The rebound was largely powered by consumer spending (+40.7%), which was itself spearheaded by an impressive jump in durable goods spending (+82.2%). Services spending rose more modestly (+38.4%).
  • The remarkable recovery in the US housing market was also front and center in the GDP report. Residential investment grew by 59.3% on account of expectation-defying strength in the resale market, and is now 5.1% above its pre-pandemic level. Other major GDP components also saw considerable increases with the exception of government spending, which fell by 4.5%. State and local governments, whose revenues have plummeted during the pandemic, reduced their expen­ditures (-3.2%) for the second straight quarter. Employment within these entities has contracted by 6.0% since February.
  • The spending recovery was also borne out in the September personal income and outlays report. Personal spending grew by 1.4% month-on-month, the fifth consecutive month of gains, while personal income rebounded by 0.9% following a pullback in the month prior.
  • Talks between the White House and Democrats in the US House of Representatives broke off with no agreement, meaning any further negotiations will have to wait until a lame duck session of Congress after next week’s election. Proposals for expansive aid to state and local governments and liability protections for businesses have been major sticking points in the negotiations. Should the Democrats sweep both houses of Congress and the White House, a very large rescue package is expected early in the new administration.
  • In the US presidential race, former Vice President Joe Biden’s lead in the Real Clear Politics average of national polls narrowed to 7.3% from 7.9% a week ago while his lead in the battleground states of Arizona, Florida, Michigan, North Carolina, Pennsylvania and Wisconsin declined to 3.2% from 4.1%. Biden’s odds of election edged down to 63.6% while President Donald Trump’s odds of reelection dipped to 35.3%, according to the Real Clear Politics average of betting odds. In addition to watching the presidential race, investors are keeping an eye on the Senate, where Democrats are favored to gain control in Tuesday’s election.
  • Equities suffered their worst weekly declines since March, as the resurgence in the coronavirus and election uncertainty weighed on sentiment. With the narrow exception of the S&P 500 Index, the major benchmarks fell into correction territory on Friday morning, or down over 10.0% from recent highs. The declines were broad-based, but information technology and consumer discretionary shares fell the most within the S&P 500. The small utilities, materials, and real estate sectors held up best, while the Cboe Volatility Index (VIX) reached its highest level since early June.


  • Flash estimates for GDP in the eurozone in the third quarter of 2020 showed a large sequential uptick, as quarter-on-quarter growth was 12.7 % compared to -11.8 % the previous quarter, and significantly above expectations. This was by far the sharpest increase observed since the time series started in 1995. The corresponding year-on-year growth rate was -4.3 %, compared to -14.7 % in the earlier period. Country-specific estimates for France, Germany, Italy, and Spain showed economies exhibiting outlier positive quarter-on-quarter growth rates at 18.2%, 8.2%, 16.1% and 16.7 % respectively.
  • The flash annual consumer price index was flat year-on-year in October at -0.3 and core inflation was 0.2 year-on-year and also flat compared to last month. Both were in line with expectations. Across the main categories, food, alcohol and tobacco had the highest annual rate (2.0%, compared with 1.8% the month before), followed by services (0.4%, compared with 0.5%), non-energy industrial goods (-0.1%, compared with -0.3%) and energy (-8.4%, compared with -8.2%).
  • The European Central Bank took the unusual step of strongly signaling that it will unveil a package of additional easing measures when the Governing Council next meets again in December. An increase in the size and duration of asset purchases and more favorable long-term repo terms are potentially parts of the package to be unveiled at the next ECB meeting. News that inflation in the eurozone remained at -0.3% in October further catalyzes the view that more easing measures are needed in order to boost inflation back toward the central bank’s target near 2.0%.
  • Shares in Europe tumbled the most since their March swoon, as investors worried that lockdowns aiming to control the coronavirus’ spread could push the eurozone economy into a double-dip recession. Political uncertainty in the US also weighed on sentiment. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 5.56% lower, while Germany’s DAX Index dropped 8.61%, France’s CAC 40 lost 6.42%, and Italy’s FTSE MIB slid 6.96%.
  • Brexit talks have resumed after the EU and the UK agreed to intensify talks aiming at a deal in mid-November. Over the past few weeks, there have been many news stories citing anonymous government officials stating that talks are moving in the right direction and markets welcomed EU’s chief negotiator Michel Barnier’s comments that a deal is within reach. The main issues remain fisheries and level playing field conditions (a common understanding on corporate taxation, state aid, workers’ rights, environmental standards etc.). EUR/GBP is now trading in the lower end of the recent 0.90-0.92 range.


  • British business confidence has fallen for the first time in five months, hit by the resurgence of COVID-19 cases and restrictions to contain their spread, a survey showed on Friday. Lloyds Bank’s business barometer slumped by seven points to -18, dragged down by the services sector. Confidence among manufacturers and retailers edged up. Hann-Ju Ho, a Lloyds Bank economist, said companies were also worried about the prospect of a no-deal end to Britain’s post-Brexit trade transition with the European Union on 31 December.
  • British house prices rose by the most in nearly six years in annual terms in October but the mini-boom in the housing market is likely to slow soon, perhaps sharply, mortgage lender Nationwide said on Friday. Prices increased by 5.8% from September’s 5.0% rise, faster than a median forecast of 5.2% in a Reuters poll of economists. In monthly terms, prices were up by 0.8% from September, a slight slowdown but faster than the poll forecast of 0.4%.
  • Britain’s car manufacturing industry had its weakest September in 25 years due to a slump in the number of vehicles exported to the United States, industry figures showed on Thursday. Factories produced 114,732 cars last month, 5.0% fewer than in September 2019 as the sector struggled to recover from the COVID-19 lockdown, the Society of Motor Manufacturers and Traders (SMMT) said. British car production this year is on track to fall below 1 million vehicles for the first time since 1999, after a near-complete shutdown in April and May.


  • China continues to deal with COVID-19 quite well and sees continuing economic recovery. Last week, Q3 GDP numbers together with retail sales and industrial production further underscored the growth in the economy. One of the reasons is the very few coronavirus cases as Chinese authorities keep a tight surveillance and control measures in place. In addition, they are providing a steady stimulus, both monetary and fiscal. The Chinese currency CNY has strengthened 7.0% against the USD since May.
  • Beijing reported that industrial sector profits climbed roughly 10.0% in September from a year earlier, driven by strong growth in computer and other electronic equipment manufacturing. Though year-to-date cumulative profits growth is negative owing to the first quarter’s coronavirus-driven plunge, the rebound in profits at large industrial enterprises is noteworthy. However, a quarterly survey of small to medium-sized enterprises revealed that private manufacturers remain cautious and reported low inclination to borrow or invest, despite signs of recovery in profitability and orders.
  • Chinese stocks fell in sympathy with the downturn on Wall Street, with the benchmark Shanghai Composite Index declining 1.6% and the large-cap CSI Index shedding 0.5%. The yield on the 10-year sovereign bond ended flat at 3.20%, and the dollar-renminbi currency exchange rate stayed broadly stable. In currency news, the People’s Bank of China (PBoC) asked domestic banks to suspend the use of a so-called countercyclical factor (CCF) in fixing the renminbi’s daily midpoint against the US dollar, Reuters reported. The CCF (which is an adjustment made by contributing banks to influence the value of the yuan) was introduced in 2017 as a tool to dampen excessive currency volatility. The PBOC’s move to neutralize the CCF was interpreted as allowing the renminbi, which is tightly managed by the central bank, to become more market-driven.
  • Politics were in focus as China’s Communist Party held its fifth plenum in Beijing from 26 to 29 October, during which party leaders outlined their 14th five-year plan for the country’s longer-term economic and social development. Guidelines for the latest plan focused on sustaining higher-quality growth through encouraging innovation and reform. Party leaders also released modernization targets for the next 15 years until 2035, including raising China’s per capita GDP to the level of “moderately developed countries,” reported state-run media. Beijing has eyed boosting domestic demand, upgrading supply chains, and seeking self-sufficiency in key technologies as ways to hedge against external uncertainties, including what it sees as an increasingly hostile US. Overall, however, the fifth plenum press release offered few policy specifics

Sources: T. Rowe Price, Reuters, MFS Investment Management, TD Economics, M Cassar Derjavets.