The US economy has made steady and impressive progress in 3Q. It is uncontestable that the economy is still suffering from the effects of the Covid-induced shutdowns and related strictures on business operations. However, the remaining softness is either confined to sectors that are still laboring under severe shutdown constraints or else is the lagged effects of weak demand some months ago.

Both consumer and business demand for merchandise has rebounded fully back to and through their pre-Covid levels. Goods production is rising nicely, but has not bounced as sharply as demand, as producers have been cautious to see whether the restored demand would sustain. The difference was accommodated by a sharp reduction in inventories. Inventories are showing signs of rebounding, restored demand is continuing and we believe it is just a matter of time before goods production fully reaches pre-shutdown levels.

The situation is even more positive for construction. There, new-home sales are much higher than their pre-Covid levels, and it is merely pipeline issues that have so far kept construction spending below pre-Covid levels. This will likely change very soon, as builders catch up with demand. In service sectors, however, shutdowns and consumer fears have kept passenger travel, accommodations and recreation sectors from achieving anything more than a token bounce, though health care and restaurants have rebounded more strongly.

A full recovery in these sectors most probably awaits the introduction of a credible COVID-19 vaccine. Until then, it will be a bifurcated economy, with near-complete recovery in some sectors, but only partial recovery in those sectors most affected by social distancing. Both the Fed’s monetary policy and governments’ fiscal policy are likely to key off those sectors still suffering.

Our growth expectations for the eurozone in 2020—contraction of around 9%—remains unchanged. However, we now believe that the better-than-expected economic rebound underway in Q3 will run into more significant headwinds during Q4, mainly as the result of (local) restrictions to contain the second waves of Covid-19 infections and also due to fading fiscal policy support. Looking into 2021, we believe that some economies might recover to end-2019 GDP levels next year whereas the harder-hit ones will only do so in 2022.

At a national level, fiscal stimuli have averaged around 4% to 5% of GDP, but supplementary measures including government guarantees have varied widely, ranging from close to 0% to essentially open-ended. European economies are likely to end 2020 with fiscal deficits in the 7% to 12% range, with debt-to-GDP ratios increasing between 10% and 20%. As the focus shifts to next year’s budgets, there will be a transition from stop-gap measures to those promoting longer-term policy priorities. In addition, the fiscal measures taken at the European level in May and July will provide support over the next few years, although the impact will only be felt later in 2021 and beyond.

While the ECB’s Targeted Longer-Term Refinancing Operations (TLTRO) continue to provide ample liquidity at very favorable rates to European banks, the ECB has slowed down its purchases under the €1.35 trillion Pandemic Emergency Purchase Program (PEPP) as market dislocations and fragmentation risk have receded. In fact, government bond yields have trended lower and are close to historic lows in some jurisdictions. With eurozone inflation already starting to drift below the most recent—not particularly optimistic—projections, the ECB is now more likely to extend and upsize the PEPP, which is currently set to end in June 2021. In addition, a return of pandemic-related adverse conditions in asset markets could make the need for a higher purchase pace even more obvious.

In the UK, the Bank of England has started some preparatory work to potentially push policy rates into negative territory, but has denied that this is an option in the near term. That said, monetary policy might have to step up again, including by potentially increasing the size of the quantitative easing (QE) envelope, as some fiscal policy support measures are expected to run out in Q4 and negotiations with the EU over a post-Brexit trade relationship have just been extended into October and are so far inconclusive. Our base case remains that both sides will reach an accord on some form of free-trade agreement that would be better than the WTO fallback.

Per its latest growth estimate, the Asian Development Bank expects Asia as a region to decline by 0.7% in 2020. This will be the first regional contraction since 1962, and only China is expected to buck the contraction malaise with a growth rate of 1.8%. However, in the aftermath of Covid, growth for developing Asia is expected to rebound by a strong 6.8% in 2021 led by China (+7.7%), India (+8.0%) and Indonesia (+5.3%). For now, Asia’s recovery continues to be led by exports out of North Asia, driven primarily by inventory restocking as well as medical-related demand. Containment fatigue is setting in, with governments correspondingly losing their appetite to continue with mobility curbs or lockdowns. The challenge will be the strain on healthcare systems even if mortality broadly remains low. While there are early signs of progress on vaccines, COVID-19 will likely remain a lingering concern. It will be some time before social and business travel return to normal. Market confidence, though, will be fundamentally underpinned by policymakers having demonstrated their willingness to do whatever it takes to prop up their economies.

For now, Asian economies continue to benefit from both fiscal and monetary policy space with the only exception being India and Malaysia, which have higher public-debt ratios than their peers. While core inflation remains subdued in most Asian countries, headline inflation might see a spike due to oil price inflation. Asian central banks are expected to keep policy rates at current levels heading into the end of the year, even though there is clearly room for further easing with most countries having low foreign currency debt and strong current account surpluses. The policy pause is also driven by the increasing challenges with monetary policy transmission as well as the intent to maintain monetary policy space if growth conditions deteriorate.