ECB: Firm Economic Recovery Coming, Underlying Price Pressures Subdued

6 May 2021

By David Barwick – FRANKFURT (Econostream) – A firm economic recovery is coming, while the inflation outlook past the short-term surge of rates remains subdued, the European Central Bank said on Thursday.

In its third economic bulletin of the year, the ECB said that the short term continues to face uncertainty related to the pandemic and vaccination efforts, but also because of persistent supply bottlenecks. Delivery times are now as high as last spring, ‘although this time these signal also rising global demand’, it said.

Further out, vaccination campaigns should underpin ‘a firm rebound in economic activity in the course of 2021’, the ECB said, cautioning nonetheless that ‘a full recovery remains some way off.’ The ECB’s internal trade tracker ‘points to a continued recovery of global trade in the first quarter of 2021’, while in the hard-hit service sector ‘there are signs of a bottoming-out’.

The bulletin painted a positive picture in the US, noting that the New York Fed’s Weekly Economic Index indicated a significant acceleration in growth since early March. The Japanese economy ‘appears to be gradually strengthening’, with ‘signs of a modest recovery’ in the UK and a ‘solid recovery’ in China, it said.

Neither about corporate investment nor about consumer spending did the ECB sound particularly optimistic. Despite modest growth of corporate investment in 1Q, high uncertainty and weaker balance sheets ‘may weigh on investment decisions later this year’, it said, while ‘the saving rate is likely to remain above its pre‑pandemic level in the short term before gradually normalising thereafter’.

The recent pick-up of inflation notwithstanding, ‘underlying price pressures remain subdued in the context of significant economic slack and still weak demand’, the ECB said, with wage pressures evidently weak.

The headline inflation increase this year has ‘reflected several factors which can be considered mostly temporary and are partly of a statistical nature’, it said. In particular, the contribution of energy inflation ‘can be expected to stay in the data for most of 2021 and then diminish early next year.’

Both shorter- and longer-term market-based indicators of inflation expectations continued to rise after the Governing Council met in March, despite negative pandemic developments and stalls in vaccination campaigns, the ECB noted.

‘Preserving favourable financing conditions over the pandemic period remains essential to reduce uncertainty and bolster confidence, thereby underpinning economic activity and safeguarding medium-term price stability’, the ECB said. ‘Euro area financing conditions have remained broadly stable recently after the increase in market interest rates earlier in the year, but risks to wider financing conditions remain.’