The second wave of coronavirus has caused the recovery to stall and we forecast euro-zone GDP to stagnate for the next six months, with an outright recession a significant downside risk. We think Spain’s economy will probably contract in Q4, while Germany is very likely to remain the region’s strongest performer. Governments will provide more fiscal support than previously anticipated, but this will not prevent unemployment from increasing which in turn will weigh on consumption. With inflation stuck well below target, the ECB will make its targeted loans to banks more generous and expand its emergency asset purchase programme, which should keep peripheral government bond yields falling.
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