Macroeconomic Review- October 2020

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October 2020 Macroeconomic

Global Economy

o About 34 million people have been infected and 1 million have died, this is the death toll of the Coronavirus so far. It is now clear that trying to live alongside the Coronavirus turns out to be a daunting task

The OECD updated its growth forecast from a contraction of 6% to 4.5% but noted that the recovery would take a long time and that further fiscal and monetary assistance is needed. A large revision was recorded in China (-2.6% to 1.8%), which is expected to be the only economy in the G-20 to grow in 2020, but large revisions were also recorded in the United States (-7.3% to -3.7%) and Europe (-9.1% to -7.9%). Emerging markets are proving to be a weak link in the global economy, with their inability to cope with the Coronavirus prompting the OECD to downgrade its growth forecasts. It is worth noting India, which is expected to shrink by 10.2% (-3.7% in June forecast), the worst performance of major economies

The race for the development of vaccines, drugs, and rapid test kits continues and it now appears that several companies are expected to receive approval from the health authorities as early as the end of 2020 and early 2021. Impressive progress has been made in the development of rapid test kits, some of which have already been approved

The financial markets tumbled last month amid fears of another dangerous morbidity wave, which will combine the Coronavirus with the flu and will inevitably lead to further restrictions on the global economy

o Meanwhile, decision-makers around the world continue to pour huge sums of money into markets and economies with great determination to enable households and businesses to survive the difficult period. Some major central banks have seen a change in attitude towards meeting inflation targets, and ,as a result, future monetary policy is expected to be more accommodative

United States

The daily number of Coronavirus cases in the US has steadily risen in the past month after various countries continued to open up the economy.  However, the number is still half the peak recorded in July, when infections reached almost 80K a day. The US account for about 20% of all the world’s confirmed cases and deaths. A rate slightly lower than the peak (25%) after the epicenter of the Pandemic has continued to shift towards emerging countries such as India, Brazil and Mexico

o Despite the resurgence in Coronavirus cases, the inability of Congress to reach bipartisan spending bill and the coming election, it seems like the gradual economic recovery continues, albeit at a slower pace. Retail and housing activity, have rebounded to pre-pandemic levels, but the labor market still has a long way to go, as jobless claims point to stalling in the recovery. The big concern now is that sustained uptrend in cases will ultimately weigh on consumers and damage their confidence

o The economy recover gradually, but few sectors still run far below pre-pandemic levels. Restaurants which improved but remained 43% below pre-pandemic levels, public transportation steadied at about half of its norm, and airline passenger traffic picked up slightly though remained at a third of its normal levels

o Meanwhile, Fed officials reiterated there’s a long way to go for an economic rebound, which will likely require more support, and kept on emphasizing the need for further aid. These messages underscore the Fed preemptive approach, which prefers to pursue an overly accommodative policy, rather than jeopardizing the fragile economic recovery. In general, it seems that monetary policy according to the Fed is not just a story of price stability and interest rates, but a policy that is responsible for issues that were previously considered political such as inequality, climate and more. The pandemic seems to have reshaped the role of central banks, led by the Fed


A new wave of Coronavirus cases due to loosen lockdowns is jeopardizing economic recovery. EU countries are making every effort to overcome the renewed outbreak without taking drastic measures

o After several positive months, economic indicators show signs that economic activity took a renewed hit. While manufacturing activity remained robust as reflected in the manufacturing sector's PMI (53.7 from 51.7), the services sector fell to 47.6 from 51.9, a level that reflects a contraction. On and all, the composite PMI remained above the 50 levels, at 50.1, although this is the lowest level in 3 months, which expresses a stagnation in economic activity

o Meanwhile, the excess liquidity in the Eurozone continues to rise after the ECB recently completed another round of lending in which it handed Eurozone banks 174 million euros, in what is known as TLTROs. This tool of cheap loans at a negative interest rate of 1% for 3 years becomes a key tool of the ECB in its attempt to stimulate economic activity until a vaccine is found, without harming the banking systems. The side effect of the ECB's intervention is an increase in excess liquidity in the bloc to a level of 3 trillion and a decrease in the 3-month Euribor interest rate to a historic low of -0.5%

o While Economic recovery is delayed and the economy is expected to shrink by 8% this year, inflation is negative for the first time in 4 years and the Euro weighs heavily, it is not surprising that investors expect the ECB to take a preemptive approach and launch a new round of incentives. This could be reinforced by the words of the ECB's chief economist, who has suggested more must be done to revive inflation even if the worst of the economic crisis has passed


Loss of control over the spread of the Coronavirus as a result of poor management led Israel to another full lockdown. It is difficult to estimate at this stage the economic damage involved in entering a second lockdown, but it is clear that the loss of confidence in the existing leadership and its ability to navigate the country is likely to make it hard to achieve its goals

The OECD estimates that Israel is suffering from severe economic shock resulting from the Coronavirus crisis. The organization estimates that the Israeli economy will experience a contraction of 6% during 2020, before gradually recovering by 2.9% in 2021. The low GDP growth in 2021 is due to the high uncertainty over the virus and the weak global demand. Unemployment rate is expected to remain above pre-crisis levels until the end of 2021

o As of the first half of September, consumer-confidence has improved slightly, but is still in strong negative territory, reflecting great pessimism, uncertainty about the personal and general economic situation, and great caution regarding big-ticket buying intentions. The survey does not reflect the entry into another full lockdown

The expected dramatic increase in the debt-to-GDP ratio to a level of about 80% make Israel’s credit rating downgrade inevitable, and the question is not whether but when the event will occur, and what its impact will be on local financial markets. The Shekel's depreciation against most currencies during September reflects the grave concern among investors and traders

The BOI announced that the banking system will allow for a further extension of the bank loan payments program. To date, 15.8% of the total the banking system’s credit portfolio is deferred, an evidence of the severe distress in which households and businesses are in as a result of the crisis, and the tremendous exposure of the banking systems to the crisis