The deepest economic crisis in post-war history is emerging. Economists expect the ECB’s crisis policy to be long, and some experts expect bond purchases to increase significantly.
The interest rate meetings of the European Central Bank (ECB) and the US Federal Reserve this week are all about the virus crisis. Because of the unprecedented economic downturn as a result of the pandemic, US dollar guards on Wednesday and eurozone monetary watchdogs on Thursday may again be required as fire extinguishers.
Economists expect the euro area economy to shrink 3.4 percent in the first quarter. Before the onset of the corona shock, however, the economy in the US was in much better shape than in the euro zone, which is why the decline in the opening quarter should not be as drastic. But it is already clear that the virus pandemic will trigger the deepest economic crisis in post-war history worldwide.
“The ECB has to prepare for a longer defense battle,” said economist Ulf Krauss from the Helaba bank. Despite the monetary policy support measures that have already been launched, a quiet interest rate meeting on Thursday is not to be expected: “We believe that the ECB has already done a lot, but more will be needed,” said economists at the US investment bank Morgan Stanley . The institute expects the economy in the euro area to collapse by ten percent in 2020. To counteract this, the ECB is likely to increase its new pandemic bond purchase program by 1 trillion euros in the coming months, in two tranches of 500 billion euros each – “one in June and the other at the end of 2021,” they say Experts ahead.
According to Christian Lips, chief economist at NordLB, the ECB has already decided to inject large amounts of liquidity and topped up its bond purchases for 2020 to 1.1 trillion euros. To this end, they relaxed the collateral regulations for banks. Nevertheless, the risk premiums for Italian government bonds have risen significantly recently. According to traders, this fueled fears of a new sovereign debt crisis in Europe.
“We therefore assume that the ECB will make another move,” says Lips. “This will certainly include more bond purchases, but probably also a rate cut on the deposit rate.” A larger part of the money will then be exempted from the penalty interest. Since September 2019, the ECB has been charging penalty interest of 0.5 percent on funds that commercial banks park with it overnight.
Drive on sight
However, many economists assume that ECB chief Christine Lagarde will wait again on Thursday. The reason: the central bank wants to examine how the aid measures already decided have had an impact. In the view of Commerzbank economist Michael Schubert, tactical considerations should also play a role. The ECB has always been very much in favor of a strong common approach of fiscal policy in the euro area. “Should it now take additional measures in advance, this would reduce the incentive for the governments of the euro countries to decide on further aid measures at European level.”
The motto currently applies to the US monetary authorities: drive on sight. Fed watcher Bernd Weidensteiner from Commerzbank does not anticipate any further measures after the central bank has already launched emergency programs worth billions and set the key interest rate to almost zero. The Fed can certainly point to success as a crisis helper. This would have reduced the liquidity problems in important markets – including the market for US government bonds. Fed chief Jerome Powell will also point out these successes at the press conference after the meeting on Wednesday: “Above all, he will underline that the Fed will act again if necessary,” said the Commerzbank economist.
This does not appear to be unrealistic in view of the devastating effects of the virus pandemic on the US labor market and the economy. Within a few weeks, the crisis destroyed the job creation from the previous boom decade. This also increases the dangers that the full employment sought by the Fed will suddenly turn into mass unemployment. The economy is also facing a similarly bleak development: after a long period of upswing, a severe recession threatens.
A few hours before the Fed meeting on Wednesday evening (CEST), the figures for gross domestic product (GDP) are due in the first quarter: Economists expect an annualized minus of 4.0 percent after an increase of 2.1 percent in the fourth quarter 2019. “I am expecting clear declines in the economic growth figures for the starting quarter 2020, in particular in Europe, but also already in the USA, which should be followed by double-digit negative rates in the current second quarter”, fears Robert Greil, the chief strategist of Merck Finck. The economic downturn left neither governments nor central banks a choice but to take further measures to support and recover the economy.
(APA / Reuters)
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