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European Central Bank sees slower growth next year, faster pick up later

The European Central Bank expects economic growth to rebound more slowly next year as the pandemic continues to weigh on output but the recovery could be quicker in 2022 than earlier thought, its updated economic projections showed today. 

In what it describes as the baseline scenario, the ECB expects GDP to expand by 3.9% percent next year, slower than its September forecast of 5%. 

But in 2022, growth is seen at 4.2%, above a previous projection of 3.2%, ECB President Christine Lagarde said. 

The ECB also sees inflation next year at 1%, unchanged from its last projection, while in 2022, inflation is seen at 1.1% against 1.3% seen three months ago. 

In the bank’s initial projection for 2023, inflation is expected to rise to 1.4%, still well short of the ECB’s target of almost 2%.

Christine Lagarde said risks to the euro zone economy remained tilted to the downside but had become less pronounced.

The ECB President also said the coronavirus pandemic may yet trigger more economic challenges despite encouraging news about the prospective rollout of vaccines. 

“It will take time until widespread immunity is achieved, while further resurgence in infections with challenges to public health and economic prospects cannot be ruled out,” she told the bank’s post-policy meeting news conference.

Earlier, the ECB rolled out yet more stimulus measures to lift the euro zone out of a double-dip recession and provide support to the economy while its 350 million people wait for coronavirus vaccines to be deployed. 

With many businesses closed, unemployment surging and debt hitting record highs, central bank cash has thrown governments and firms a lifeline this year but much of 2021 will pass before significant relief is likely. 

Making good on its promise to keep supporting the economy during the pandemic, the ECB expanded its debt purchase scheme.

It also agreed to provide banks with even more ultra-cheap liquidity as long as they keep passing the cash onto companies. 

“Uncertainty remains high, including with regard to the dynamics of the pandemic and the timing of vaccine roll-outs,” the ECB said in a statement. 

“The Governing Council therefore continues to stand ready to adjust all of its instruments, as appropriate,” it added. 

The ECB increased the overall size of its Pandemic Emergency Purchase Programme by €500 billion to €1.85 trillion euros, in line with market expectations. 

It also extended the scheme by nine months to March 2022, with the aim of keeping government and corporate borrowing costs at record lows. 

Reinvestments of cash maturing from the emergency bond purchase scheme were extended by one year until the end of 2023.

The ECB also extended the period during which banks will get a 1% interest rate from the central bank for borrowing at its long-term cash auctions by one year to June 2022. 

Aiming to give banks ample liquidity, the ECB will also hold three additional tenders for three-year loans with the last one now scheduled for December 2021, it added. 

In further help to banks, exceptionally easy collateral requirements that were introduced in the spring were also extended until June 2022. 

The ECB also kept interest rates unchanged at record lows, although it maintained a long-standing pledge to cut them further if necessary. Its deposit rate now stands at -0.5% while the main refinancing rate is unchanged at 0%.

The stimulus expansion comes as the 19-country euro zone struggles to
balance a growing range of short-term risks against improving long term

The immediate future carries the prospect of a triple shock – a lingering second wave of the pandemic, a hard Brexit and a delay in the European Union’s €750 billion recovery fund, due to be discussed at an EU summit today. 

But all three are seen as temporary shocks, with the political strife likely to be resolved and the pandemic easing by the spring, leaving the ECB with the task of getting the bloc through a difficult winter. 

The success of a vaccine meanwhile has improved longer-term prospects and policymakers have already expressed confidence that life could be returning to normal by the second half of 2021 as immunisation reaches a critical level.  

New ECB staff economic projections are expected to show weaker growth in 2021 due to the second wave of the coronavirus, but better prospects in 2022, leaving the overall growth path little changed. 

The new measures, similar in vein to past stimulus, are unlikely to push borrowing costs much lower as the ECB has argued that its job was to keep borrowing costs around record lows for longer, rather than to reduce them further. 

But anaemic inflation will more than justify the idea of low for longer and fresh ECB projections are expected to show price growth well below the bank’s near 2% target even in 2023, which would be the 11th year of undershooting its objective in a row.

Article Source: European Central Bank sees slower growth next year, faster pick up later – RTE

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