ECB’s Schnabel: Economic Output Back at Pre-Pandemic Level by Mid-2022

25 February 2021

By David Barwick – FRANKFURT (Econostream) – Eurozone economic output should be back at pre-pandemic levels by the middle of next year, European Central Bank Executive Board member Isabel Schnabel said Wednesday.

In an interview with Latvian news agency LETA, the text of which the ECB made available, Schnabel said that despite question marks surrounding the first quarter, 2021 growth would be similar to the 3.9% projected in December, thanks to a range of favourable factors.

‘Due to the continued lockdowns, economic growth in the first quarter of 2021 may be somewhat weaker than expected’, she said. However, there are ‘quite a few encouraging signs’, she continued, including ongoing vaccination efforts, a faster-than-expected global economic recovery and U.S. President Joseph Biden’s fiscal support package.

Given these along with ‘the historically favourable financing conditions and an expansionary fiscal policy, annual growth is likely to be in the same ballpark as projected in December’, she said. Euro area output ‘should be back at its pre-crisis level by mid-2022’, she said. ‘So we are seeing light at the end of the tunnel.’

The current situation is characterised by ‘substantial uncertainty due to the new variants of the virus, which is posing some downside risks to the short-term outlook’, she said. However, ‘we are now much better able to deal with lockdowns’, so that ‘the second lockdown will have less severe economic consequences than the first one.’

Schnabel warned against a premature withdrawal of policy support. Monetary policy would safeguard against any ‘unwarranted tightening of financing conditions’, she said. Were real interest rates to rise too quickly as economic prospects pick up, this could threaten the recovery, she said. ‘Therefore, we are monitoring financial market developments closely.’

Long-term structural trends depressing interest rates are unlikely to reverse soon, she said, ‘but we shouldn't think that it will not happen at all.’

Low insolvencies reflect support measures, she said. ‘The critical point will be reached when these measures are phased out’ and a cliff effect could lead to higher non-performing loans, she said. Still, the region’s banking system ‘should be able to cope with this as long as the support is not withdrawn too early and too abruptly, and as long as the overall conditions remain favourable, including the financing conditions provided by the ECB.’