Financial Markets Monthly - September 2020

It’s been six months since COVID-19 was declared a global pandemic and many advanced economies implemented draconian measures to slow the virus’s spread. The resulting declines in economic activity over the first half of 2020 were on a previously-unthinkable scale, ranging from 7% in Australia and 10% in the US to 22% in the UK (all non-annualized). The early recovery has also been impressive, though, with re-opening in the late spring and summer teeing up for sizeable Q3 gains in many of the economies we track. But those increases won’t be nearly enough to absorb economic slack, and future growth will be harder to come by.

Already there are signs of flagging momentum in the euro area, where some countries are experiencing coronavirus outbreaks rivaling those seen back in April. Australia saw a less severe contraction in GDP earlier this year thanks to its relative success in handling the virus, but rising case counts and renewed lockdown measures sapped momentum in Q3. In some jurisdictions, the fiscal support that prevented even worse economic outcomes and laid the foundation for recovery is beginning to fade. Expiry of wage subsidies in the UK could lead to a significant increase in redundancies, and Congressional gridlock in the US has allowed unemployment insurance top-ups to lapse for millions of Americans. Canada and a number of European countries have extended support programs but still face slow, bumpy recoveries and second-wave risks.

The strength of the early recovery and policy support underpinned the rally in equities. The US stock market in particular was quick to retrace earlier losses and reached a new record high in early September. High-flying tech stocks (some benefiting from pandemic trends like online shopping and work-from-home) have been key to the US markets’ performance, notwithstanding a recent selloff in the sector, while less tech-heavy indices in Canada, the UK and Europe remain below pre-pandemic levels. Central banks are ensuring financial conditions remain accommodative, even as governments ramp up borrowing. Balance sheets have expanded by anywhere from 6% (RBA) to 18% (BoC) of GDP. Where fiscal support is fading, monetary policy is set to do even more. The Fed doubled down on its low-for-long commitment, and we expect the UK will expand QE later this year before adopting negative rates early next year. We see government bond yields being pinned low throughout our forecast horizon as the recovery continues.


  • The US economy has seen a strong, consumer-led rebound but confidence was down in August amid higher case counts and smaller unemployment cheques
  • The Fed’s shift to flexible average inflation targeting won’t have much bearing on near-term monetary policy but suggest interest rates will remain low for even longer
  • Canada’s economy is also in line for firmer-than-expected Q3 growth, and extended government support programs have reduced downside risks for the consumer
  • Rising coronavirus infections, expiring wage subsidies and significant trade uncertainty pose challenges for the UK’s economic recovery; we expect the BoE will add more stimulus
  • Survey data suggest the euro area’s recovery is already losing some momentum, and worsening outbreaks in a number of countries add to concern


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    Josh Nye is a senior economist at RBC. His focus is on macroeconomic outlook and monetary policy in Canada and the United States. His comments on economic data and policy developments provide valuable insights to clients and colleagues, and are often featured in the media.

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