PwC/AGEFI Monthly Barometer - November 2020

In collaboration with AGEFI Luxembourg

Economic Confidence Indicator

November 2020

Our barometer increased by 6 points this month, based on the revised methodology*. This upward trend seems fragile, given the markets’ evolution in the second half of October and the new lockdown.

Luxembourg remains resilient towards the crisis. As recently reported by STATEC, employment has returned to its pre-crisis levels, with new jobs being created in the healthcare, financial, construction and education sectors. The manufacturing sector is also looking upbeat, fuelled by positive evidence regarding order books, sales prices, employment and output. However, the majority (68%) of companies believe that COVID had a negative impact on their activities. This number is up from the previous 49%, a reversion of the decreasing trend. For the construction sector, even though overall confidence is negatively affected, it still remains above the long-term average, thus indicating strong activity in this sector. Finally, the banking sector is showing more resilience, given the relative low exposure (15% of business loans) to businesses that were directly affected by COVID. 

In the Eurozone, overall business activity declined in October, led by a drop in the output of the service sector. Despite a better than expected GDP growth of 12.7% over Q3 2020, the PMI Composite fell to 49.4 from 50.4 in September. The service sector, the most affected by COVID-related restrictions, drives this downward movement. On the other hand, manufacturing output growth accelerated significantly during the same period, as new orders grew at the highest rate since January 2018. Overall, aggregate business activity in the euro area seems to be slowing down for the last quarter of 2020, given the enforcement of new lockdown measures in the region and the strong presence of economic uncertainty over the short to medium term.

The IMF World Economic Outlook published in October provided revised estimates for the yearly GDP growth in 2020 and 2021. Global output growth was revised upwards by 0.8%, indicating a less severe economic contraction but followed by lower growth in 2021 – not reaching pre-crisis levels. Euro area and US growth were also revised upwards, given the better-than-expected GDP growth in Q2 and Q3 2020 for those regions. However, the IMF predicts a slow momentum in Q4 2020, since the number of infections is increasing globally. In addition, policymakers are running out of ammunition and will face difficulties during the second wave of the pandemic given that the extensive use of monetary and fiscal policies earlier this year have saturated the space for policy action. These facts, combined with increasing debt levels and, thus, increased tensions in the sovereign debt markets, point towards a volatile 2021 which could be characterized by market instability and economic stagnation. 

_{*For this release of the barometer, we apply a new methodology aiming at better reflecting the economic outlook based on various sentiment indicators for both the euro area and Luxembourg. These monthly indicators are based on surveys that cover the service, construction, retail, industrial and financial sectors, with data starting from 2006. By doing so, we are better able to capture the underlying dynamics of the economy, making the barometer more accurate in predicting the evolution of the economy. The resulting Barometer values can range from -100 to 100.}