Euro zone heading towards unprecedented economic slump with 5% and 12% fall in 2020 GDP

On Thursday, Christine Lagarde, President of the ECB, warned the European nations of the unprecedented economic contraction which lies ahead due to the measures adopted to contain the spread of coronavirus. Ms. Lagarde said, “Survey indicators for consumer and business sentiment have plunged, suggesting a sharp contraction in economic growth and a profound deterioration in labour market conditions. Given the high uncertainty surrounding the ultimate extent of the economic fallout, growth scenarios produced by ECB staff suggest that euro area GDP could fall by between 5% and 12% this year.”

Speaking at the ECB’s General Council meeting, along with the bank’s Vice-President Luis de Guindos, Ms. Lagarde emphasised the need for maintaining liquidity in the system. Europe economies need cash now more than ever as the authorities would soon be lifting the lockdown, which would open the road to recovery, though the pace and scale of recovery remains uncertain. ECB is trying to keep the borrowing cost low and its Pandemic Emergency Purchase Programme, currently resting at 750 billion, is helping in pulling the worst impacted economies like Italy out of recession.

ECB’s chief economist Philip Lane who reviewed the recent changes in the central bank’s monetary policy, in a blog post on ECB website, said “Such non-fundamental volatility in spreads impairs the smooth transmission of monetary policy across countries and it is a basic task for the central bank to counter such destabilising force.”

Early on Friday, ECB said that the economic activity in the continent is expected to drop by 15% percent for the current quarter before “a protracted and incomplete recovery” over the rest of 2020.

With regard to the ECB’s pessimistic predicts for GDP, Lane said, It is critical that financing conditions remain highly accommodative, so that households and firms are not only able to weather the impact of lockdowns but can also obtain funding on favourable terms to finance consumption and investment once we enter a recovery phase.”

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