November Economic Monthly: Navigating a sea of waves

November seems to be the month for making waves. In the United States, the anticipated 'blue wave' proved elusive in the presidential election and Joe Biden's narrow lead in some key swing states suggests waves of recounts and possibly also waves of legal allegations and lawsuits could follow the eventual result.

In Europe, a second wave of the virus has led to the second wave of lockdown measures, which will almost inevitably push most economies into a double-dip recession and will probably trigger new waves of monetary and fiscal stimulus.

The US election has been a nail-biting event and is, unfortunately, still undecided at the time of finalising our latest Monthly update. The only silver lining to the election going into extra time (for us, at least) is that our analysis of a Trump or Biden presidency on the US, Asian and European economies has a longer shelf life. And there will be more excellent coverage of the US elections from my colleague James Knightley. Stay tuned.

In Europe, some social distancing restrictions in October were not enough to prevent a second wave of new infections. As a consequence, many countries have gone into lockdown again. Some of these lockdowns could be labelled as ‘smart’, others as ‘light’ and others simply as ‘lockdown 2.0’. What all the lockdowns have in common is that they aim to restrict social interaction, which will mainly hit the service sector. As a result, the eurozone economy will fall into recessionary territory again in the final quarter of the year. The European Central Bank has already pre-announced that a new round of monetary support will follow at the December meeting. It is hard to see that governments will not start their own wave of fiscal stimulus soon as well.

While Europe grapples with a second wave of infections and the US is still in the midst of its first, Asia looks different. Up until now, most Asian countries have managed to stave off a second wave. Better experiences in dealing with past pandemics as well as mask-wearing, testing and sometimes resolute tracking and quarantining are probably the main reasons why Asian countries are doing better than the US or Europe.

Against this background, we have once again updated our three macro-economic scenarios going forward and introduced more region-specific differentiations. The second wave of the virus makes it impossible to come up with a one-size-fits-all underlying assumption. Regarding Europe, the former first risk scenario has now become our base case scenario.

New lockdowns, possibly on-and-off until spring next year, and the gradual rolling out of a vaccine in the first half of next year are the underlying assumptions. With the new restrictions, the eurozone economy will not return to pre-crisis levels before the end of 2022. For the US economy, our base case scenario is still one without new lockdowns but the European experience of the last few weeks illustrates how fast such assumptions can change. The only region for which our underlying assumptions look extremely solid is Asia. To use the ECB's language, risks to the outlook are rather tilted to the upside.

To some extent, Asia currently resembles the rock in an economic sea of many waves.