The minutes released by the ECB illustrate that the ECB does not have exclusive insights into how to counter the crisis and the conclusion from the analysis of the available data is that the eurozone economy will see a sharp initial rebound, while the form of the subsequent recovery is far from clear. The word “uncertainty” appears 20 times in the minutes.
During the discussion on the economic outlook, the ECB made the important distinction between rebound and recovery, for example stating that “it is important to stress that although economic activity was gaining momentum, there was no room for complacency.” The fact that the growth and inflation outlook in the June projections were “conditional on substantial monetary policy support, while any premature tightening of financial conditions could jeopardize the ongoing recovery”, shows that the current monetary stance is bound to stay still a long time.
There was a bit of controversy during the discussion. Some ECB members have stated that the total size of PEPP purchases (€ 1.35 trillion) it should be “considered a ceiling rather than a goal”. Opponents of quantitative easing have therefore not yet given up their resistance.
Looking ahead, the latest comments from senior ECB officials in early August emphasized that the ECB remains on high alert. The ECB chief economist, Philip Lane, stressed that the ECB expects a very gradual recovery after the initial rebound and suggested a clear willingness to do more, if necessary, to bring inflation back to target.
The expectations for September
The next meeting of the ECB is in September and “it will probably come too soon to take a clearer position on the trend of the recovery, but it will certainly create some more headaches regarding the inflation prospects”, notes Carsten Brzeski of Ing who points out that the appreciation of the euro exchange rate in the summer months could lower inflation forecasts almost mechanically between 0.2 and 0.4 percentage points. Remember that in the June forecast, inflation is expected to stand at 0.8% in 2021 and 1.3% in 2022.
“Since the uncertainty will not have definitively disappeared at the September meeting, the meeting will come too soon for new action. However, new downward revisions of inflation forecasts could be the stimulus for new monetary stimuli before the end of the year ”, argues the expert from Ing.
The work node
As well as the freeze on layoffs in Italy, similar job retention programs in other European countries should finish in the quarter of 2020 and in the first quarter of 2021. The consequence will be that the unemployment rate will begin to reflect some of the enormous economic damage caused by Covid-19.
Unemployment remained artificially low during the Covid-19 pandemic, with European governments stepping in to subsidize wages and keep workers on payroll. Ing’s chief economist, Carsten Brzeski, believes this will have significant consequences for the labor market by fueling the possibility of a double recession for Europe.
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