we have upgraded our growth outlook for the US and Europe
October 8, 2020

We have upgraded our growth outlook for the US and Europe

Invesco Fixed Income

The global economy has experienced an unusual recession - one induced by public policy following a health crisis, rather than an economically driven one. The recession took hold rapidly as people were asked to stay home to limit the spread of the coronavirus and allow time for the medical sector to deal with a pandemic that caught the world unprepared. As outbreaks have been brought under control, the exit from recession has also been rapid. Compared to our expectations at the peak of the crisis, the economic contraction has proved to be shallower than we expected and the recovery faster. As such, we have upgraded our growth forecasts for the US and eurozone.

Better than expected growth

Recent growth outcomes in the US and Europe have beat expectations for a number of reasons. First, the opening of the US and eurozone economies has been more rapid than anticipated. Most countries were able to resume much of their economic activity without major second waves of the virus. In regions that experienced renewed outbreaks, such as the US South and West, the spread of the virus was limited without full lockdowns. Instead, targeted business closures, mask wearing and social distancing have been effective.

Second, some sectors are less exposed to the virus, such as construction and manufacturing, where production and sales are recovering sharply. Other sectors where face-to-face interaction is essential still face challenges and will likely not fully normalize until a vaccine becomes available. But a partial recovery in such sectors is underway - think of restaurants serving food outside, hairdressers serving clients with masks and personal protection equipment and sports events returning to TV. Clearly, there has been a loss of jobs and incomes in these sectors, but policy support has helped.

Third, policy support has been quick, very large, and effective. During the global financial crisis, new monetary policies, such as quantitative easing (QE) and forward guidance, had not been tried or tested and were consequently deployed gradually and timidly. In Europe, QE was not launched until 2015. This time, however, central banks announced monetary stimulus in the form of forward guidance and QE programs immediately after the coronavirus shock. On the fiscal side, governments have offered an unprecedented amount of income support and loan guarantees, providing a cushion for business and consumer spending.

These policies have been arguably effective. In a typical recession, debt levels tend to be high, creating a need for deleveraging in the early stages of a recovery that tends to hamper the effectiveness of monetary policy. This recession, however, has not been triggered by economic reasons and the private sector still has the ability to borrow. Therefore, we believe monetary policy can be more effective in the current environment. In the US, high levels of activity in the housing sector and mortgage applications is one sign of this. In the eurozone, European Central Bank (ECB) lending surveys have suggested that, despite some signs of tighter conditions, the credit channel has remained open in the region.

We expect economic recovery to stay on track

Going forward, we expect the economic expansion to continue for the reasons outlined above. Traditional economic data, as well as high-frequency alternative indicators, such as mobility and credit data, confirm the strong rebound in activity in the third quarter in the US and eurozone. We expect growth to remain strong in the fourth quarter, but to slow somewhat, since most of the economic opening in the two regions is now behind us. Given that uncertainty remains high, we continue to provide alternative scenarios for our economic outlook.

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Important information

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