Update: 11 February 2021
Our view on economic growth:
After rebounding strongly in the third quarter, European economic growth was much more moderate in the fourth quarter. Quarter-on-quarter growth in the euro area turned negative again, while economic growth in Belgium and the Czech Republic remained slightly positive. The new pandemic measures following the resurgence of Covid-19 infections played an important role in this situation. The divergence between the weak service sector and the more resilient manufacturing sector was particularly noticeable. The manufacturing sector held up relatively well, helped by its more export-oriented character, meaning it also benefited from the more favourable economic recovery in China and the US.
The second pandemic wave gained some fresh momentum towards the end of 2020. Nevertheless, things appear to have taken a turn for the better in the fourth quarter. In particular, the approval of several vaccines and the start of vaccination campaigns have boosted hopes that the pandemic will ultimately be a temporary phenomenon. The agreement between the EU and the UK at year-end 2020 also reduced uncertainty about future trade relations, although the agreement is still far from complete. The conclusion of the US presidential elections removed another significant political risk. At the start of 2021, the main economic risk would seem to be in the form of a possible third pandemic wave and unexpected obstacles to the vaccination campaign.
2021 is set to be a year of transition. The impact of the vaccination programmes on the economic recovery will probably become increasingly visible in the second half of 2021. We expect an accelerated recovery for the European economy as of the second half of 2022.
Our view on interest rates and foreign exchange rates:
Monetary and fiscal policy continue to support both the US and the euro area economies. We expect the Fed and the ECB to keep their policy rates unchanged in the years to come. Moreover, the extension in size and duration of the ECB’s Pandemic Emergency Programme in December suggests that the environment of low long-term interest rates will remain in place for quite some time. We also expect intra-EMU sovereign spreads – and Bulgarian sovereign spreads – to broadly remain at their current compressed levels.
The exchange rate of the Hungarian forint against the euro was quite volatile during the fourth quarter and, on balance, ended the quarter virtually unchanged. We expect the Hungarian forint to strengthen somewhat against the euro in the first half of 2021, allowing the Hungarian Central Bank to ease its monetary policy stance again. The Czech koruna strengthened against the euro during the fourth quarter, helped by the support for long-term interest rates. We expect the Czech National Bank to raise its policy rate by 25 basis points in the second half of 2021.
The exchange rate of the US dollar against the euro weakened further in the fourth quarter, mainly as a result of weak real interest rate support. Some slight further depreciation in the short term is possible, but we expect the dollar to broadly stabilise in 2021, mainly on the back of increasing long-term interest rates in the US.
At present, a number of items are considered to constitute the main challenges for the financial sector. These stem primarily from the impact of the coronavirus crisis on the global economy and, in particular, the financial sector (including credit and market risks and the impact of persisting low interest rates on our results). These risks come on top of risks relating to macroeconomic and political developments, which affect global and European economies, including KBC’s home markets. Regulatory and compliance risks (including anti-money laundering regulations and GDPR) remain a dominant theme for the sector, as does enhanced consumer protection. Digitalisation (with technology as a catalyst) presents both opportunities and threats to the business model of traditional financial institutions, while climate-related risks are becoming increasingly prevalent. Finally, cyber risk has become one of the main threats during the past few years, not just for the financial sector, but for the economy as a whole.
For more detailed analyses and data, please refer to KBC Economics.
Disclaimer: the expectations, forecasts and statements regarding future are based on assumptions and assessments made when drawing up this text. By their nature, forward-looking statements involve uncertainty. Various factors could cause actual results and developments to differ from the initial statements. Moreover, KBC does not undertake any obligation to update the text in line with new developments.