Update: 12 November 2020
Our view on economic growth:
Growth in the euro area and US bounced back strongly in the third quarter of 2020, as did KBC’s home markets. It followed the sharp contraction in the second quarter caused by the pandemic and subsequent policy responses, which led to a lockdown of large parts of the economy. Therefore, the robust third-quarter growth figures largely represent a mechanical impact of economies opening up again, supported by massive monetary and fiscal stimulus packages. The Chinese economy is a notable frontrunner in the recovery cycle, as it returned to positive growth as early as the second quarter of 2020.
However, the pace of this recovery should be treated with caution. First of all, economic activity is still below pre-pandemic levels in both the service and manufacturing sectors, underlining the fact that there is still a long way to go to full recovery. Secondly, forward looking indicators point to downside risks with regard to the strength of the continued recovery in the fourth quarter of 2020 and the first quarter of 2021. In particular, the recovery in the service sector seems to be losing strength of late, with the manufacturing sector still showing some resilience. The ongoing second wave of the pandemic is also leading to policy responses such as renewed partial or full lockdowns, which will at least temporarily disrupt the road to recovery. Such temporary restrictive policy measures are already being implemented in many European countries. The respective governments are, however, doing their best to limit the direct impact of these measures on economic activity as much as possible.
The other main risk factors to recovery include the Brexit transition phase ending without an EU-UK agreement, as well as renewed tensions in the economic conflict between the US and China.
Our view on interest rates and foreign exchange rates:
The US and euro area economies are strongly supported by monetary and fiscal stimuli. We expect the Fed and the ECB to keep their policy rates unchanged in the years to come. Additional quantitative easing by the ECB is likely, with the size and duration of the Pandemic Emergency Purchasing Programme probably being extended. These market interventions will help to preserve the low longer-term interest rate environment for even longer and compress intra-EMU spreads – and Bulgarian sovereign spreads – in the coming years.
The Hungarian central bank recently tightened its policy stance to support the weakening exchange rate of the Hungarian forint against the euro. This depreciation was largely the result of increased global risk aversion. We expect the tightening to be a temporary policy measure, as the forint is forecast to appreciate to a certain extent again in the fourth quarter of 2020. The Czech koruna has also weakened against the euro, which – like the forint – is likely to be a temporary situation. We expect the Czech National Bank (CNB) to keep its policy rate unchanged. If the CNB decides to intervene, it is more likely to use unconventional policy measures.
Since August, the exchange rate of the US dollar has broadly stabilised against the euro, after having weakened significantly over a number of months previously. We expect the dollar to resume its gradual depreciation against the euro in the fourth quarter of 2020, since a major driving force behind the euro – real interest rate differentials – is expected to remain in place.
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, market and liquidity 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, such as Brexit and trade conflicts, all of 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.