Solid economic data may not be a good guide to how the euro zone recovers from its deepest economic crisis in living memory, European Central Bank chief economist Philip Lane said, cooling expectations after some surprisingly strong figures.
Having bottomed out in April, the bloc’s economy is reviving as curbs linked to the coronavirus pandemic are gradually lifted. Unexpectedly strong PMI data on Tuesday raised hopes for a relatively quick, V-shaped recovery.
But Mr Lane said that while “substantial improvement” in near-term indicators was normal given the depth of the contraction, this was not a good guide to the future. Activity would remain far below pre-crisis levels for an extended period, he said, given lingering restrictions.
“Income losses and precautionary savings continue to weigh on consumption,” he said. “Likewise, weak demand, continued supply constraints and ongoing social distancing restrictions are hampering the normalisation of economic activity.”
He said fiscal measures, particularly talks over a €750 billion EU recovery package, were also likely to have a major impact on how quickly confidence rebounded. “The outcome of negotiations about the EU recovery fund will be an important factor in determining the future path for the euro area economy,” Mr Lane added.
The ECB was determined to support this recovery and it could even cut interest rates, though such a move might prove ineffective because longer-term sovereign yields become virtually unresponsive to rate cuts in stressed conditions.
“While we stand ready to cut policy rates in the future as market conditions normalise and if warranted by the medium-term inflation outlook, this evidence tilts the balance towards asset purchases as the more efficient tool in current circumstances,” Mr Lane added. – Reuters
