MNI POLICY: Infection Surge Blunting EZ Recovery - ECB's Lane

A Covid-19 resurgence and containment measures across Europe and globally are dampening consumer and investor sentiment and spending, as well as impacting external demand for eurozone exports, European Central Bank chief economist Philip Lane said Tuesday.

Eurostat's preliminary flash estimate for output in the second quarter indicates a quarter-on-quarter decline in GDP of 12.1%, Lane wrote in an ECB blog post, slightly less severe than the 13% decline envisaged in June's Eurosystem staff projections. The cumulative decline in output in the first half of 2020 was 15.3%

Eurosystem staff expect the third quarter to see a significant increase in economic activity, Lane continued, "even if the scenarios differ in terms of the overall duration and severity of the pandemic shock," with the baseline scenario predicting a return to pre-pandemic levels of activity in 2022.

However the step-up in third quarter activity may be less steep than originally expected, he added, with more sectors transitioning from the reopening phase to a more gradual growth rate. It would be unwise, Lane wrote, to "draw strong conclusions from the second quarter outturn: at the least, the data for the second and third quarters should be jointly assessed."

The key determinant of ECB monetary policy stance during the crisis is the overall envelope of its pandemic emergency purchase programme, PEPP, Lane wrote, adding that "in line with the ECB's price stability mandate, the inflation outlook plays the central role in determining the appropriate monetary stance."

December 2019's Eurosystem staff projections anticipated annual HICP inflation at 1.6% in 2022, which was revised down to 1.3% in June's projections.

"This downward revision to the inflation outlook motivated the scaling-up of the PEPP envelope from EUR750 billion to EUR1,350 billion at the June meeting of the ECB's Governing Council," he explained.

Uncertainty remains exceptionally elevated, dampening business investment, he wrote. Actual and expected declines in employment and income mean precautionary household savings will remain elevated, with banks expecting a net tightening of credit standards for loans to firms, in part related to the projected tapering-off of state credit guarantee schemes.