ECB’s Lane: Part of 3Q GDP Improvement Maybe Already Happened in 2Q

4 August 2020

By David Barwick – FRANKFURT (EconoStream) – Although Eurozone economic activity should be much better in the third quarter, some of the expected improvement may have already been reflected in the outcome for the second quarter, European Central Bank Executive Board member Philip Lane said Tuesday.

In a blog post on the ECB website, Lane, who is also Chief Economist of the ECB, said that it had ‘long been clear’ that the worst economic toll would be taken in the second quarter, given the extent of the contraction in April.

The flash euro area GDP estimate for 2Q of -12.1% on the quarter, yielding a cumulative decline of 15.3% for the first half of the year, was ‘slightly less severe’ than the -13% called for by Eurosystem staff projections, he noted.

However, the 2Q result may have benefitted by a faster-than-expected loosening of restrictions on economic activity in May and June, effectively bringing forward some of the improvement that would otherwise be anticipated in 3Q, he said. It would thus be ‘unwise’ to infer much on the basis of 2Q, he said, and better to consider 2Q and 3Q in tandem.

Although the third quarter would bring a ‘significant increase’ in economic activity, he said, Lane seemed keen to manage expectations, noting the rising Covid-19 case numbers in some regions and that ‘[i]n addition to the direct adverse impact on some sectors (especially tourism), setbacks in the containment of the virus are also weighing on consumer and investor sentiment.’

As well, external demand for exports from Europe is suffering a ‘measureable impact’ due to the pandemic’s resurgence elsewhere, he said, while high uncertainty is generally weighing on investment and precautionary savings are likely to remain elevated.

Though bank lending conditions are still favourable, the ECB’s latest survey suggests a coming net tightening of standards, he added. ‘These factors help to explain why the economy is expected to take a significant amount of time to recover fully from the pandemic shock and why significant fiscal and monetary policy support is necessary’, he said, reaffirming the baseline scenario of the ECB that sees output returning only in 2022 to the level prior to the pandemic.

Turning to the ECB’s pandemic emergency purchase programme (PEPP), Lane called asset purchases ‘the most important mechanism for delivering the additional monetary accommodation required to support the economic recovery and safeguard price stability in the medium term.’ The programme’s flexibility is ‘essential’ for stabilising financial markets, he added.

The latter function has been successful, he said, with the fragmentation risk ‘significantly reduced’ as a result.

Noting the deceleration of asset purchases last month, Lane suggested that this was a reflection of the programme’s success, the ‘usual summer lull in market activity’ and the adjustments made in line with the PEPP’s flexibility.

The total €1.350 trillion volume of the PEPP nonetheless remains ‘a core determinant of the ECB’s overall monetary stance’, which is determined primarily by inflation prospects, he said. The downward revision of the June staff forecasts of 2022 inflation – to 1.3% from 1.6% last December – ‘motivated the scaling-up of the PEPP envelope’ by €600 billion, he said.

In other comments, Lane hailed the recovery fund agreement last month by EU leaders as ‘vitally important in ensuring sufficient fiscal support across EU Member States in the coming years’ and reiterated the ECB’s commitment to ‘providing the monetary stimulus needed to support the economic recovery and secure a robust convergence of inflation towards our medium-term aim.’