U.S. elections – (too) close to call, but in for a judiciary battle; Eurozone recovery delayed but not derailed, and EU consumers & climate policy

Unlike the U.S. elections, we have three contenders for the best-paper competition this week – and all three are competing in a healthy and democratic coexistence: The first one looks at the U.S., where elections are turning into a judiciary battle, delaying a much needed new economic stimulus package. Our second entrant compares the recovery paths for key Eurozone economies, highlighting what makes the current ‘lockdown light’ different and why an adequate policy response is more important than ever to avoid a ‘triple-dip’ recession. And our third candidate takes a closer look at how far consumers are willing to pay more for climate-friendly products, an essential step for Europe to reach its goal of climate neutrality by 2050. And, out of competition: our pharma sector update.

U.S. Elections turn into a judiciary battle: What’s next

As of 06 November, Joe Biden appears to have the higher chance of becoming the next U.S. President (264 potential electors - without Arizona not being confirmed yet we are at 253; against 214 for Donald Trump), with the Senate possibly remaining in the hands of the Republicans. The Trump campaign has already requested recounts in several states and we expect President Trump to use every possible means to contest the election results if they appear to be against him. A judiciary battle could last until 08 December (deadline for re-counting and legal disputes, six days before the Electoral College meets on 14 December to vote for President and Vice President), potentially requiring the intervention of the Supreme Court.

• The U.S. political decisional process could be frozen until January 2021, even as government intervention is urgently needed to smooth the economic impact of a second Covid-19 wave
• We expect stringency of confinement measures to increase over the next six to eight weeks to slow down the spread of the virus, with a peak in January 2021
• In this context, a delayed stimulus caused by the judiciary dispute and political fragmentation will drag the performance of U.S. GDP growth in Q4 2020 and Q1 2021
• During the freezing of budgetary decisions until the beginning of next year, the U.S. central bank will be on its own in dealing with the negative shock in Q4 2020 and the beginning of Q1 2021. We expect the Fed to re-accelerate the pace of securities purchases before year end
• A modest steepening of the Treasury yield curves is to be expected, in line with the rapid increase in public deficit and debt ratios that will in any case happen
• Even if an increase in the corporate tax rate is less to be feared than in a blue wave scenario, the overvaluation of U.S. equities remains a source of concern as it provides little cushion against adverse outcomes
• Our worries regarding the corporate bonds segments have increased, notably for the high-yield segment as it is not part of the Fed’s classic job description to lend to insolvent non-financial businesses.

Find our current analysis here.

Delayed but not derailed - The Eurozone recovery after ‘lockdown light’

A long (European) economic winter is coming: A Eurozone Q4 double dip is all but certain, given the second wave of lockdowns. The stronger-than-expected growth rebound in Q3, with GDP growing by a record-setting +12.7% q/q, proved that Eurozone economies can rebound rather swiftly as restrictions are lifted. The big question now is if they can do that again. After all, the fresh round of tough restrictions announced in recent weeks is all but certain to plunge the Eurozone economy back into a contraction in the final quarter of this year. Don’t expect to see an H1 2020 replay: There are important differences compared to Europe’s first lockdowns as their economic hit to Q4 2020 GDP should prove 30-60% less severe. The Eurozone recovery could thus be delayed but not derailed. Q4 2020 GDP looks set to contract by around –4% q/q, bringing the full-year 2020 forecast to –7.6%. However, expect a timid recovery in 2021 (+4.1% vs +4.8% expected at end September) as strict rules on social interactions remain in place. Only in the second half of 2021 will the anticipated availability of an effective vaccine, to be rolled out before year-end, provide some much needed tailwind to the economic recovery by reducing economic uncertainty. Nevertheless, the risk of long-term scarring to the economy has risen in the face of more insolvencies, higher unemployment and increased pressure on the banking sector.

Desperately seeking an adequate policy response: For our baseline scenario to hold, policymakers will have to swiftly upgrade their crisis response, with a view on propping up private sector confidence, averting a ‘triple-dip’ recession and keeping a lid on permanent damage to the economy. This would require national governments to ramp up their contact tracing strategies, while extending emergency fiscal relief (above all short-work schemes and public credit guarantee schemes). On the monetary policy side, the ECB will have to recalibrate its policy response at the upcoming December meeting by boosting its QE programs by EUR500bn for 2021 to keep a lid on refinancing costs for governments as well as the private sector and ensure sufficient liquidity provision. What does this mean for corporates? A prompt and rightly sized policy response should avoid a large-scale corporate cash-flow crisis. The share of SMEs which have a negative EBITDA margin is estimated at 15-20% in the four biggest Eurozone economies. In addition, the share of zombie SMEs stands between 8-10%. That is why the double-dip confidence effects could prove more dangerous by discouraging companies to cover the cash-flow issue with additional debt in an environment where turnover growth in the hardest hit sectors is not expected to go back to pre-crisis levels before 2023. What does this mean for capital markets? Yield curve steepening, equity overvaluations providing little cushion against adverse out-comes and corporate (high-yield) bond worries. One could expect a modest steepening in sovereign yield curves, more so in the U.S. than in the EMU, in line with the rapid increase in public deficit and debt ratios. Secondly, on the equity side, overvaluations have been boosted in the U.S. and Emerging Markets compared to Europe and provide little cushion against adverse outcomes. In the U.S., they also represent a downside risk on the USD exchange rate. Lastly, our worries regarding the corporate bonds segments have increased, notably for the high-yield segment as it is not part of a central bank’s classic job description to lend to insolvent businesses. You can find our analysis here.

Consumer and climate policy: ‘Wash me but don’t get me wet’

European households account for as much carbon dioxide emissions as the manufacturing sector. For the EU to reach its target of climate neutrality by 2050, they will have to change their behavior, but our research shows on average 46% of French and 44% of Germans respondents are not prepared to pay significantly more for climate-friendly products. Around a quarter of all carbon dioxide emissions in 2018 were attributable to activities by households, a share on par with that of the manufacturing sector and just a tad below power generation. Even more striking: progress in recent years has been dismal. While manufacturing and power generation have reduced their carbon footprints by 20% and 27, respectively, since 2008, households have only managed a 9% reduction. The consequence: The share of households’ emissions increased by 2pp over the last decade.

In our latest “Allianz Pulse”, we surveyed a representative sample of 1,000 people in France, Germany and Italy, asking them, among other things, about their willingness to pay higher prices for climate-friendly products, from food and clothing to mobility and housing. The results are sobering: just under half of respondents in France and Germany said they were willing to pay more for climate-friendly products. And of those, 32% (France) and 35% (Germany) were only prepared to accept a maximum of 10% higher prices. Genuine willingness to pay looks different. Italy fares a little better in that respect: only 36% of those surveyed in Italy were unwilling to pay; 41% would pay up to 10% more. But the group of respondents who would be prepared to pay significantly higher prices – i.e. 10% and more – is very small in all three countries (just over 20%). A carbon tax is not popular, either. The spirit of the Yellow Vest protests is still alive – and not only in France. When asked about a carbon tax and its impact on gasoline prices, 39% of French, 35% of German and 32% of Italian respondents said that there should be no price increases following the introduction of a carbon tax, which means simply that they are adamantly against the introduction of a carbon tax at all. And 43% (France), 44% (Germany) and 48% (Italy) of respondents concede that only small price increases of up to 10% would be appropriate.

What does this mean for policy-makers? Even after Covid-19, climate policy remains a tightrope walk between what is socially desirable and what is personally acceptable. The pandemic has increased risk awareness and sharpened the consciousness of the vulnerability of our way of life, besides offering a historic window of opportunity to accelerate the global transition to a net zero emission society. But what has not changed is the attitude of many people when it comes to concrete climate actions: wash me but don’t get me wet. Thus, effective and responsible climate policy needs bold nudges and price signals to initiate the necessary behavioral change; a token carbon tax will not suffice. Moreover, the transition to a decarbonized economy is no free lunch: the necessary investments will cost hundreds of billions of euros and all this cannot simply be financed by new debt. The debt pile-up during the pandemic has already overstretched the finances of many states. Thus, effective and responsible climate policy will require hard choices about who pays for it. Please find the full report here.

Updated sector reports

Pharmaceuticals: Rated L (low risk for enterprises): The race to find a vaccine for Covid-19.