ECB Brief: Weidmann Sees Germany in Good Shape, Doesn’t Drop Any Policy Bombs

28 June 2021

By David Barwick – FRANKFURT (Econostream) – This is a quick take on comments made Monday by European Central Bank Governing Council member and German Bundesbank President Jens Weidmann in a speech at the Frankfurt Euro Finance Summit:

  • Weidmann essentially repeated a range of assertions he has made before regarding macroeconomic developments, the probably transitory nature of higher current inflation, the eventual end of pandemic emergency purchase programme purchases – no surprises here.
  • Said the pandemic remains a major determinant of German economic activity and further setbacks are possible, but that it is ‘plausible to assume … that all significant containment measures can be dispensed with in the first months of 2022.’
  • Held out hope that if containment measures continue to be lifted quickly, private consumption could boost German output to its pre-crisis level this summer, with growth of just under 4% this year and ‘a good 5%’ next and capacity utilisation to be above normal from the start of 2022.
  • Revealed that on the basis of a Bundesbank survey, a quarter of pandemic-related additional savings is expected to support consumption in the next two years.
  • Argues that ‘the dangers of inflation should not be exaggerated’, as the current increase to around 4% later this year in Germany is temporary, and although other factors could also lift inflation, the second-round effects ‘crucial for a stubbornly excessive inflation rate’ are ‘not currently in the offing.’
  • Admits that regarding inflation, upside risks predominate.
  • Says that for the euro area, uncertainty is now lower, ‘concerns that the euro area could slip into deflation have dissipated’ and there is ‘a preponderance of upside risks for price developments’.
  • Reiterates that the rise in nominal government bond yields since the beginning of the year is mainly due to inflation expectations and thus ‘also an expression that our monetary policy is working.’
  • Insists again that the PEPP ‘is clearly linked to the pandemic and must be terminated as soon as the emergency situation is overcome’, the conditions for the termination being the lifting of ‘all significant measures to contain the pandemic that restrict economic life’ and the solidification of the economic recovery.
  • Says that ‘the underutilisation of overall economic capacity in the euro area would no longer be exceptional in the coming year.’
  • Considers still existing uncertainty reason not to ‘determine the exit from monetary policy crisis mode far in advance’, and notes that PEPP purchases could be gradually reduced to avoid an abrupt end.
  • Adds: ‘In any case, the Governing Council was right not to commit itself here - neither in one direction nor in the other.’