Interview
Europe’s Slowing Economic Recovery
- Economic activity in the euro area is projected to contract by approximately 8.5% in 2020 and recover by about 6.5% in 2021, with the UK facing an estimated 11% decline in 2020 and a subsequent 7% recovery in 2021, following a Q3 pace that was softer than the recovery trend.
- Real GDP in the U.S. is expected to return to 2019 levels by mid-2021, sooner than in other major developed economies such as the UK or France, while the gap in economic performance between nations that opened after the global financial crisis is anticipated to widen further due to COVID-19.
- A trade agreement is potentially reachable by mid-November before year-end, though it is expected to be minimal and subject to future revisions, with a no-deal Brexit and trading under WTO rules posing significant downside risks that could result in non-trivial output losses, particularly for the UK.
- Price pressure is unlikely to increase in the very near term given the time required to close large negative output gaps, and long-term investors are expected to maintain strategic asset allocations supported by ample policy backing, very low rates, and modest inflation.
- Clients are advised to align equity allocations with risk tolerance while overweighing the U.S. stock market, as the U.S. is projected to outperform Europe in 2021 and the historical outperformance of the S&P relative to the IFA or emerging market equities is expected to continue.
- Monetary authorities are expected to tighten policy only if and when inflation deviates upward against their specific mandates, with the current outlook favoring a continuation of current supportive conditions.