Christine Lagarde Calls for Optimism and Holds Growth Forecasts
The European Central Bank (ECB) stays on its growth forecasts despite new lockdowns hitting Europe, which could further weaken business activity and output.
The head of the European regulator Christine Lagarde spoke out against economic pessimism, saying that the recovery will occur as uncertainty over the pandemic decreases and that Europe has all the tools necessary to overcome the crisis.
Even with most of the 19-nation eurozone isolated, Lagarde continued to predict a recovery on the condition that economic constraints can be lifted from the second quarter of 2021 and the European bloc can overcome «laborious» initiation of vaccination.
«I think our latest predictions in December are quite plausible», – said the President of the European Central Bank Christine Lagarde.
Last month, the ECB cut its 2021 growth forecast to 3.9%, after cutting 7.3% in 2020. But increasingly widespread restrictions on movement and activity in countries including Germany and France, along with slow vaccine introduction, are already questioning this prediction just two weeks before 2021..
Last month, the governments of many European countries announced tough new measures to curb the spread of coronavirus or extend the restrictions already in place at the time..
The Netherlands announced on Tuesday that it is introducing a lockdown until February 9th. Germany in isolation since November last year, is considering the possibility of its extension for another 8-10 weeks. Austria is closed until the end of January. France tightens curfew, and Portugal is considering national quarantine.
These measures followed the rise in the number of infections and deaths from Covid-19 during the Christmas period. In some cases, the new numbers are even worse than during the first wave of the epidemic, which occurred in the spring of 2020..
«Significant restrictions will remain in effect beyond January. In some countries, the gradual reopening of work may begin sometime in February. In other cases, this may not happen until March», – said Florian Hens (Florian Hense), Eurozone economist from Berenberg.
However, Lagarde's main concern is what happens after March..
Christine Lagarde, International Monetary Fund
«Concerns may be raised that isolation measures will still be applied in these Member States after the end of March and if, for example, vaccination programs are slowed down», – said Lagarde.
The eurozone began vaccinating its citizens shortly before the end of 2020. Critics argue Covid-19 vaccines are being introduced too slowly and that the number of vaccine doses is insufficient.
However, the European Commission, which has signed contracts with vaccine manufacturers, has denied these allegations..
On December 10, the ECB announced that, according to its forecasts, «sufficient» herd immunity level will be reached by the end of 2021.
The longer the blockages continue, the more this will have an impact on the economies of countries with a single currency..
Strong euro gains against the dollar also risk slowing growth and inflation, but Lagarde has maintained the ECB's cautious tone despite big gains at the start of the year..
«We are very careful, we will continue to be very attentive to the impact of exchange rates on prices», – she said, adding that the ECB is not targeting any specific exchange rate level.
Private sector economists are already slashing their growth forecasts, with Bank of America forecasting 2.9% growth, a full percentage point below its previous forecast.
To support the eurozone economy, the ECB has already extended its ultra-soft policy until 2022, but with record low borrowing costs and significant negative values in some eurozone countries, its residual stimulus power is limited..
Lagarde said the ECB could renew its Bond Purchase Promotion Program (PEPP), which will last until March 2022, if needed, but could also refrain from using the entire 1.85 package. trillion euros ($ 2.25 trillion), which was allocated by the bank for purchases if the crisis passes.
«If the package we agreed on is too large and we do not need the entire volume, so be it», – she said. «We will buy adequately to meet our goal of favorable financing terms. If more is needed, we will recalibrate».
Lagarde also rejected calls for the bank to publish its new inflation target before a comprehensive policy review by the European regulator is fully completed, arguing that «very big» the group on the Board of Governors strives for a single package. The results of the survey are expected around the middle of the year.