This week's long-awaited meeting by the European Central Bank's Governing Council confirmed that existing stimulus measures have been "recalibrated" to ensure the duration of support matches the projected path of the pandemic and that favourable financing conditions are maintained throughout. Backed by the optimism around vaccine developments, the ECB's updated economic projections are based on the overarching assumption that the effects of the pandemic dissipate by the end of 2021 ahead of a pick-up in the recovery in early 2022. The actions taken by the Governing Council this week had been well signaled by the ECB in the lead-up and will see the length of its pandemic support response pushed out to match this timeline.
The headline announcement was a €500bn increase in the Pandemic Emergency Purchase Programme (PEPP) envelope to €1,850bn, with a 9-month extension to take purchases through to at least end-March 2022. Term funding to the banking sector was also expanded and the conditions made more favourable. Under TLTRO-III, the ECB will offer liquidity to the banks at a minimum rate of -1.0% for an additional 12-month period to mid-2022, with three new rounds of funding under the scheme to be made available over the second half of 2021 (with maturities of 3 years). Banks will also be able to access more funding than was previously the case, equating to 55% of their stock of eligible loans up from 50% earlier. Furthermore, the period under which the relaxed rules around the quality of collateral banks must provide to obtain the funding has been lengthened to mid-2022. The changes to the PEPP leave an important backstop in the European sovereign debt market in place for longer, keeping spreads compressed and allowing governments across the continent to keep emergency spending flowing throughout the crisis, while the TLTRO changes are aimed at ensuring ample credit supply at favourable terms to businesses and households as they confront the pandemic-induced recession.
Data this week reported that after contracting by 15% over the first half of the year, euro area GDP had rebounded by 12.5% in the September quarter on the reopening. But this progress has since been derailed by a return to shutdown after a surge in virus cases, with the ECB forecasting a 2.2% contraction in Q4 for an overall decline of 7.3% this year. This has pulled down the outlook for GDP growth in 2021 from 5.0% to 3.9%, though as the pandemic dissipatess a stronger outcome is in place for 2022 at 4.2% from 3.2% previously. The outlook for inflation remains very subdued and was little changed overall; 0.2% in 2020, 1.0% in 2021, and 1.1% in 2022, with a lift to 1.4% in 2023 still leaving it well short of the ECB's target. With that being the case, the recent strength of the single currency has come into question, though in the post-meeting press conference President Christine Lagarde limited her remarks on the issue to noting that while the ECB does not target the level of the exchange rate it will continue to monitor it closely.
Over in the US, cross-party negotiations towards a fiscal stimulus package continues to remain in focus with the Republicans and Democrats struggling to come to terms on support for state and local governments and for liability protections for businesses and educational institutions in the case where workers or students were to fall ill due to the pandemic. One way forward is for these two issues to be carved out of negotiations for the time being so that a package can be put together consisting of measures where there is bipartisan support for immediate assistance to be provided, though even that option is struggling to gain traction. In the meantime, there were signs in the data this week from the US that the latest surge in virus cases was taking hold in the labour market as initial jobless claims came in much higher than the markets had anticipated at 835k against an estimated 725k, while continuing jobless claims printed at 5.76m to also come in above consensus (5.21m). Meanwhile, inflation in November was subdued in holding steady at 1.2%Y/Y and at 1.6%Y/Y on the core measure (excludes food and energy prices) against expectations for it to soften slightly.
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Shifting to the Australian perspective, with last week's national accounts highlighting the importance of households in driving the economic recovery through the 3.3% rebound in GDP in Q3 (see here), data this week was supportive of the durability of that story into 2021. Speaking to this was the continuation of the strength in consumer sentiment with the Westpac-Melbourne Institute Index rising by a further 4.1% in December to 112.0 with the reading now sitting at a decade high (see chart of the week, below). The turnaround has been stunning as it has been sharp. Back in August, the index had collapsed to a reading of 79.5 as Victoria was placed back into shutdown, but as the virus came under control in the state and remained contained across the rest of the nation, the prospect of sustained reopening has fuelled the optimism with consumer sentiment surging by 41% over the period.
Chart of the week
Very clearly, this has led to a quickly improving outlook for economic conditions by Australians with expectations for the next 12 months (+24.9%) and 5 years (+32.7%) both up sharply on a year ago. Off the back of this, the unemployment expectations index has improved significantly and is currently showing its most upbeat reading in nearly 10 years. Helped by policy stimulus, sentiment towards the housing market has accelerated over recent months with views around purchasing a dwelling and expectations for house prices sitting at elevated levels. On house prices, the ABS reported a 0.8% rebound in capital city prices in Q3 after a modest 1.8% decline during the shutdown-impacted Q2 (see here).
A broader reopening of the Australian economy is also driving improved confidence and conditions for firms as reported this week in the NAB's Business Survey for November. In the month, business confidence jumped by 9 points to a reading of +12 to post its 4th consecutive gain, while business conditions advanced by 7 points to +9, though weakness in the employment component (-5) remains in sharp contrast to the improvements that continue to come across trading (+17) and profitability (+15), indicating that firms want to see the positive backdrop be sustained before it starts to filter through to hiring intentions. The underlying detail reflected the optimism around the reopening with almost all surveyed industries reporting gains in confidence and conditions in November, with a notable standout being the retail sector consistent with the current strength in household spending.
