The positive newsflow on an imminent vaccine much reduces the downside risks to our baseline view for 2021 and should limit the hit to confidence during the challenging winter months as the second wave rages on. But it doesn’t change the need for strong monetary and fiscal policy support in the near term.
In fact, the growing likelihood of widespread availability of a vaccine by midnext year bolsters the case for forceful attempts to refreeze those parts of the economy affected by new lockdowns. After all, the progress on a vaccine has diminished the odds of lasting changes to consumer behaviour, which greatly reduces the risk of fiscal policy creating large numbers of zombie firms.
Governments that have not yet extended their partial unemployment or credit support programs into 2021 should follow Germany’s example quickly, in order to protect firms’ animal spirits and limit lockdowns’ drag on investment and hiring plans. France and Spain look most in need of action on the policy front.
Pressure on the ECB to deliver a substantive easing package in December also remains high. The arduous road to inflation normalisation requires a step-up in the volume of monthly asset purchases. And the PEPP should also be scaled up and extended to counter a potential tightening in financing conditions from downside risks materializing or reflationary pressures boosting real yields.