September 20, 2020

Lagarde (ECB) improves economic forecasts for 2020 and foresees a drop in GDP in the euro zone of 8%



The eurozone economy is going to sink less than expected in 2020. This was announced this Thursday by the president of the European Central Bank, Christine Lagarde, who has forecast a drop of 8% compared to the 8.7% forecast in June as the best scenario.

“The data,” Lagarde said at the press conference, “suggest a strong rebound in activity in line with previous expectations, although the level of activity remains well below pre-coronavirus pandemic levels.”

The president of the ECB has warned that “the strength of the recovery continues to be surrounded by great uncertainty, as it continues to depend largely on the future evolution of the pandemic and the success of containment policies.” Thus, “domestic demand in the euro area has recorded a significant recovery from low levels, although high uncertainty about the economic outlook continues to weigh on consumer spending and business investment. Headline inflation is being dampened by lows. energy prices and weak price pressures in the context of moderate demand and significant labor market slack. ”

In this context, the European Central Bank has decided to keep interest rates unchanged. “We hope,” Lagarde said, “that they remain at their current levels or lower until we see a strong convergence of inflation outlooks close enough, but below 2%.”

Lagarde has also announced that the purchases of the pandemic emergency program (PEPP) will continue with a total endowment of 1,350 billion. “These purchases,” Lagarde said, “help to relax the general tone of monetary policy, and to offset the downward impact on inflation.”

“Purchases will continue to be made in a flexible manner over time,” Lagarde said: “This enables us to effectively avoid risks to the smooth transmission of monetary policy. We will make net purchases until at least the end of June 2021 and, in any case, until the Governing Council [del BCE] judge that the coronavirus crisis phase is over. ”

The ECB will reinvest the principal of the securities acquired to face the pandemic until at least the end of 2022.

Likewise, it maintains its previous debt purchase program (APP) at a monthly rate of 20,000 million euros, together with purchases with an additional 120,000 million euros that are made on a temporary basis until the end of the year.

Despite the improvement in GDP forecast for this year, the ECB has decided to slightly lower the forecast for 2021, from the 5.2% estimated in June, to the 5% published this Thursday. For 2022, the data was modified by one tenth down, to 3.2%. “In general, the balance of risks for the growth prospects of the euro zone continues to be tilted to the downside,” Lagarde stressed. “This assessment reflects the still uncertain economic and financial implications of the pandemic,” added the president of the ECB.

Regarding inflation, the ECB has decided to leave the forecast for 2020 unchanged at 0.3%. Lagarde has warned that, as in August there was a deflation of 0.2%, during the next months prices will continue to fall. Inflation will not be recorded again in the euro area as a whole until “early” 2021.

In this way, the inflation projection for 2021 has been raised by two tenths, to 1%, and the estimate for 2022 has remained unchanged at 1.3%.

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