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UBS: Re-imposition of restrictions, not US elections a major downside risk for Q4

posted onOctober 21, 2020

Countries around the world are re-imposing painful Covid-19 restrictions on public life and that’s a “major downside risk” for the fourth quarter, according to Swiss banking giant UBS. Ireland became the first European country to announce a return to a full lockdown while the UK, France, the Netherlands, Spain, Portugal and the Czech Republic have all unveiled new virus-related restrictions this week such as curfews, bar and restaurant closures and curbs on social gatherings.

“Forget about the U.S. elections or fiscal stimulus — restrictions creeping higher is the single biggest near term risk to the outlook,” UBS economist Arend Kapteyn wrote in a note on Oct. 19. “If countries start to impose ‘circuit breaker’ lockdowns that last just several weeks, that may already be enough to turn a positive (fourth quarter) growth rate negative,” Kapteyn warned.

A circuit-breaker is a tight set of restrictions - it could feel a lot like the original lockdown - but crucially it would be for a fixed period of time.
The Swiss bank has been tracking coronavirus mobility restrictions in 42 geographies weekly since March on a scale of 1 to 10. If restrictiveness goes by one point for an entire quarter, gross domestic product will decline by 6 percentage points, according to UBS.

“We’ll need to monitor how long restrictions stay in place and how mobility responds, but this is now a major downside risk to our forecasts for (the fourth quarter),” Kapteyn added.

The world economic contractions since coronavirus struck have far exceeded those of the Great Recession and have occurred at a much faster rate, hitting all sectors and many of the world’s largest employers.
Unemployment in the euro area, which finally declined just before Covid-19 arrived to where it was before the last financial crisis more than a decade ago, is already rising.

And despite the European Central Bank’s planned 1.35 trillion euros of pandemic-related additional asset purchases and an historic 750 billion euro recovery fund from the European Union due to kick in next year, a return to where the economy was before the outbreak earlier this year is not expected until at least end-2022.

In the US, the world’s largest economy, roughly half of the 22.2 million people who lost their jobs in the early days of the pandemic remain out of work with economists predicting a further slowdown in hiring through the rest of 2020 and into 2021. 

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