In many ways, the economy in 2020 was not nearly as bad as it could have been. And while historically bad, our forecasts improved (became less bad) as the economy crawled its way out of the crater created by the pandemic. Early fiscal and monetary stimulus provided households with additional disposable income at the same time the pandemic hamstrung many service industries. As a result, households quarantined at home and bought durable goods like computers. Even new vehicles, hard hit in the early months of the pandemic, staged a remarkable recovery in the final months of the year.
The positive stimulus effects appeared to be waning in the last few months of the year. The situation was made worse by rapidly rising cases of Covid that pushed renewed restrictions in the U.S., Europe, and elsewhere. In the U.S., retail sales, while strongly positive on a year-over-year basis, fell month-over-month in the final three months of 2020. Likewise, retail sales in Europe have either fallen or been weak in recent months. Retail sales fell abruptly in November. The U.S. economy shed 140,000 jobs in December, the first decline since the early months of the pandemic. Momentum was slipping, and Covid was raging.
Both the U.S. and Europe have added significantly to stimulus measures in recent months, and more still are likely to come, at least in the U.S. This will likely buoy the U.S. economy, at least in the short-run. We are not likely to see additional stimulus, at least in the near-term, in Europe. This in turn will hinder economic activity and as a result our forecast is for muted growth. While we expect a small contraction in consumer spending in the early months of 2021, direct payments and expanded unemployment benefits should add to income and drive consumer spending.
The pandemic’s fallout continues to be primarily isolated to the service sector, while the goods economy continues to do well. Manufacturing sentiment has hit multi-year highs in both the U.S. and Europe. Capacity utilization continues a broad recovery as demand remains firm. While sectors like aerospace continue to reel under the burden of the pandemic, other sectors, like auto, have experienced v-shape recovers. In the U.S., manufacturers added workers in December while others were reducing their workforce. The electronics industry continues to be an economic leader in terms of both jobs and production.
If all goes according to plan, something that rarely happens, 2021 will be a year of recovery. The U.S. economy should add back over 6 million jobs. To be sure, a historic number but still far fewer jobs than were lost to the pandemic. The start of the year will remain muted in both the U.S. and Europe, but Civid cases appear to have peaked and are on the decline despite increasing cases in places like France. Vaccines are now being administered by the millions. And the coming months should bring warmer weather. Couple that together with a still historically high savings rate (meaning there is excess cash waiting to be spent) and millions of people who are likely ready to get out of their houses and the second half of the year could bring strong economic activity, especially in the service sector. There is pent-up demand that, starting in the second quarter, can be unleashed.
There remain risks on the horizon. New variants of Covid have emerged throughout the globe. There remain a lot of unknowns. Shipping rates remain extremely high, and a shortage of containers coupled with strong demand continues to exert upward pressure on pricing. For the most part, financial markets have shrugged off what at times has felt like catastrophes in the near-term. Instead, they have focused on a more positive medium and long-run outlook. Here’s to hoping that outlook materializes soon.
European economic outlook
The economic recovery underway in the aftermath of the pandemic has ground to a halt in Europe. Rising Covid infections in the last few months have led to renewed restrictions. Germany has extended its partial lockdown until February 14th. France has implemented a 6 PM curfew, which has led to a number of recent demonstrations across the country. GDP figures for the third quarter were little changed. Euro area GDP increased 12.4 percent in the third quarter (11.5 percent in the EU), the strongest quarterly growth since records began in 1995. We expect the Eurozone to contract 2.2 percent in the fourth quarter. While Germany will show only a small decline, we estimate France will see GDP fall by 4.8 percent.
The ECB governing council added 500 billion euros to its pandemic stimulus bond purchases, bringing the total to 1.85 trillion euros. They also extended regular purchases through to at least March 2022. Roughly half of this total is still waiting to be deployed in the coming months and should help provide a partial backstop to the decline. It is expected that GDP will rise only 0.4 percent in the first quarter, so growth in the Eurozone will remain muted for several months.
Despite rising cases of the virus and mandated restrictions, the unemployment rate in the EU fell one-tenth of a percentage point in November to 7.5 percent. In the Eurozone, unemployment also fell one-tenth of a percentage point to 8.3 percent. In the Eurozone, the number of unemployed workers fell by 172,000 (and 222,000 in the EU), though this figure is up 1.425 million from a year ago. The youth unemployment rate remains extremely high. For those under 25 years old, the unemployment rate increased from 18 percent to 18.4 percent. Short-time work programs continue to help to mitigate the impact of the pandemic on employment.
Manufacturers’ sentiment (PMI)
The Eurozone’s manufacturing PMI increased to 55.2, ending 2020 on a solid note. The final December reading was slightly below the initial 55.5 flash estimate. Despite a decline in overall economic activity in the final months of the year, the manufacturing sector continues to expand and retrace lost ground. New orders saw strong demand to wrap up the year, though some of this was driven by last-minute spikes in demand for German goods from England prior to Brexit at the end of the year. Factories also report one of the strongest order backlogs in nearly three years. Despite solid demand, job growth in the manufacturing sector remains tepid, and the employment index suggests the workforce is contracting.
E.U. end markets for electronics
While renewed restrictions have reduced mobility and curtailed some spending, the industrial sector in Europe continues to recover. The manufacturing output index for the EU rose strongly in November, increasing 2.8 percent over the last month. Manufacturing output is flat compared to last year.
Computer, electronic and optical products: The electronics industry, which includes categories such as components, loaded boards, computers, communications equipment, and consumer electronics, increased a reported 33.7 percent in November. The sector is now up 23 percent from last year.
Motor vehicles: The Motor vehicle manufacturing production index increased 1.8 percent in November, after increasing 8.4 percent in the prior month. Auto production in the EU is off 4.3 percent from a year ago.
Air, spacecraft and related machinery: The air and spacecraft manufacturing sector continues to struggle. Not surprising given the collapse in air travel. The production index increased 4.1 percent in November, though, after declining 4.1 percent in the prior month. The sector remains down significantly, off 23.5 percent from last year.
The full IPC report includes more information on the American and Chinese economic growth, including the PCB demand and industry employment.
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